SINGAPORE - Singapore's economy is on track to pick up pace into next year as the improved global outlook along with rising public spending spill over into private consumption, the International Monetary Fund (IMF) said.
But its small, open economy is also facing mounting global geopolitical risks and higher uncertainty.
In a regular statement outlining its forecast for the Singapore economy, the IMF noted that Singapore's economic growth momentum has improved since late-2016, supported by a recovery in the global electronics trade.
"However, the recovery has not yet been broad based and private domestic demand, particularly private investment, remains subdued," the IMF added, noting that the labour market also remains soft.
In addition, the economy continues to grapple with an ageing population, tightening of foreign worker inflows and slow productivity growth.
Still, growth and inflation will likely recover gradually in the coming months as stronger global demand and ongoing restructuring take effect, said the IMF in its statement.
It expects the economy to expand 2.3 per cent this year and 2.5 per cent next year, up from 2 per cent in 2016.
There are risks to this growth outlook. "Notwithstanding the recent trade recovery, economic and geopolitical risks have risen and could affect Singapore's highly open economy," said the IMF.
The main external risks stem from the adverse impact of more inward-looking policies in the United States and a slowdown in major emerging economies.
Tightening in global financial conditions, including faster-than-expected interest rate hikes in the US, could adversely affect households and companies with high levels of debt.
On the domestic front, uncertainty surrounding ongoing restructuring could hold back investment, productivity, and undermine improvements in income inequality.
In line with these restructuring efforts, "Singapore has embraced a new growth model for a world of rapidly advancing digital technologies and automation," noted the IMF.
"The strategy is to turn Singapore into a labour-lean economy with less reliance on foreign workers and growth based on innovation, digitalisation, and continuous investment in skills."
To complement this push, the Singapore government has also been spending more on healthcare and other aging-related infrastructure, on transportation infrastructure, innovation, and targeted transfers to promote inclusion, worker retooling and lifelong learning.
The IMF said there is still room for Singapore to ramp up public spending - both to help lift the economy in the short-term as well as to enhance its social insurance schemes.
"Additional near term fiscal stimulus - bringing forward infrastructure investment and expanding existing budget transfers to targeted groups - would boost domestic demand, help close the output gap and address the large external surplus.
"There is also scope to strengthen Singapore's permanent social insurance arrangements, including by introducing time-bound unemployment insurance," noted the IMF.
This is needed to help address the uncertainties created by technological disruption, which has led to rapid shifts in the labour market and created an environment where job tenures are shorter and more people face the risk of losing their jobs.
Singapore also continues to face challenges with improving productivity and boosting innovation.
In its response to IMF's report, the Singapore government said its spending policies over the past five years have been providing short-term support to the economy as well as helping firms and workers gear up for longer-term challenges.
Ensuring that government spending remains sustainable is key, it noted, especially as demands on the national purse continue to grow amid an ageing population and growing infrastructure needs.
Revenue collection is also tougher due in part to slowing economic growth.
"This makes it even more important to be careful about introducing major new programmes solely for short-term fiscal stimulus," the Goverment said in its response. For one, withdrawing these programmes subsequently will be difficult when the need for them abates.
On unemployment insurance, the Singapore government said such a scheme could have negative unintended consequences, such as disincentives to work.
"The authorities see merit in providing income and training support to help Singaporeans acquire new skills and prepare for new jobs in different careers and sectors even before they become unemployed."
Should workers lose their jobs, there are schemes available to help them - including retrenchment benefits, wage support, job matching help and means-tested support.