Research and analysis

Singapore’s Economy - Prospects For 2015

Published 12 January 2015

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Singapore

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Singapore

Decelerating growth in 2014…

The Singapore economy is expected to have grown by 2.8% in 2014, according to Prime Minister Lee. He described the economy as performing “moderately well,” even though this level of growth comes in at below market and IMF forecasts, and the 3.9% expansion recorded in 2013. It also (just) misses the 3-5% growth rate that is considered healthy by the government.

Two main factors contributed to the slowdown - a weaker global recovery and tight labour market. Sluggish global growth, particularly from the EU, Japan and China, contributed to the continued deterioration of Singapore’s export performance. Government policies to restrict the flow of foreign labour have pushed up wages and business costs across all sectors, though the manufacturing sector has been the main drag on growth. Productivity levels (a political priority) fell for the third year running as industries remained slow to shift into higher value-added activities and deferred high upfront investment costs (in IT, automation etc) for another year.

Overall inflation fell below zero for the first time in 5 years in November (i.e. deflation). It is a managed and expected fall in prices from ongoing measures to cool the property market, coupled with falling healthcare and transport costs. After a period of high inflation and soaring house prices this is unlikely to stoke significant concerns about deflation, and these policies should remain in place while core inflation (which excludes accommodation and private transport) stays elevated.

…Leads to an uncertain outlook for 2015

As Singapore enters its 50th year of independence in 2015, the outlook remains uncertain with an official growth range of 2-4%. The weak finish in 2014 is expected to persist into the beginning of this year, although full year growth will be affected by a range of factors that could sway growth either way. To gauge Singapore’s performance there are four main things to watch:

• a. Global demand: Singapore’s open economy is poised to benefit from the global wealth effect created by lower oil prices and an expected recovery in the US. This should help to counter weakening demand from the EU and Japan as well as lower growth expectations in China (Singapore’s largest trading partner). Overall the balance of external forces looks positive, with the key risk of being too dependent on the US as a driver for growth.

• b. Ongoing restructuring challenges: 2015 is the mid-way point in the government’s decade long restructuring plan, and constraints on foreign labour (including quotas and levies) are expected to stay in place. All sectors will need to continue to seek productivity gains to offset the crunch on available labour, with the struggling manufacturing sector particularly at risk. If this occurs there could be a positive upside to growth later in the year.

• c. Signs of financial stress: Growing leverage, high property prices and rising cross-border bank exposure will need to be monitored. Measures to keep a lid on the hot property market and high levels of household debt seem to be working. House prices have fallen for five straight quarters (and are expected to fall by 6% this year) and household debt-to-GDP has moderated at 75%. However interest rates are likely to rise along with that of the US (as is the trend) this year and place financial strain on overleveraged households and corporates.

• d. Continued deflation: Inflation is likely to stay benign in 2015, at around 0.5-1.5%. There is a small but rising likelihood that the Monetary Authority of Singapore (MAS, central bank) loosens monetary policy if growth and core inflation drop significantly or the tight labour market shows signs of trouble. As a net oil importer, falling oil prices should be a boon to the economy, although the oil and gas sector (5% of GDP) is likely to be hit and any severe downturn in Malaysia could spill over to its neighbour. There is an increased likelihood of an early election in 2015 as historically the PAP has performed better in a low inflation environment.

Comment

Singapore’s open economy puts it on the frontline of global economic conditions and next year will be no different. Controls on foreign labour will continue to be a challenge for British businesses facing strict quotas and they may have trouble securing the talent they demand. But on balance there are reasons to be optimistic. Beyond the uncertain headline GDP figure, 2015 should be a year of rising wages; low unemployment; higher government spending on healthcare, education and infrastructure; lower prices; as well as the government-driven ‘feel good factor’ of 50 years of independence.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.