Brighter economic outlook for 2018, but concerns remain

Government forecasters expect an economic expansion growth of 1.5 to 3.5 per cent for the coming year. PHOTO: ST FILE

SINGAPORE - Singapore's economy has staged a dramatic turnaround over the past year, going from the cusp of recession to its fastest pace of growth in almost a half-decade.

This strong showing is fuelling optimism among economists, corporates and market watchers about growth prospects for 2018.

Much of the lift has come from surging global demand for electronic gadgets, which is expected to continue driving growth in the new year.

But beyond this short-term, trade-driven lift, concerns linger over Singapore's longer-term growth prospects.

What forces will shape the economy next year and beyond?

Manufacturing turnaround

An explosion in semiconductor manufacturing helped reverse Singapore's economic fortunes this year.

A slew of new consumer electronics releases, including new mobile phone models, fuelled a pick-up in global demand for semiconductors and related equipment.

CIMB Private Bank economist Song Seng Wun says the manufacturing sector likely expanded around 11 per cent in 2017, making it the best performer by far; this was also its strongest pace of expansion since 2010.

Resurgent global demand also drove an export recovery, prompting trade promotion agency IE Singapore to revise its forecast for non-oil domestic exports (Nodx) upwards.

Nodx is now expected to rise 6.5 per cent to 7 per cent, up from an earlier forecast of 5 per cent to 6 per cent. If the forecast pans out, Nodx growth in 2017 will come in at its fastest pace in seven years.

There have been concerns that the trade-driven lift from electronics manufacturing might fizzle out. For much of the year, the surge in activity was concentrated mainly in trade-related industries, with growth across other sectors remaining patchy.

But the pick-up is showing signs of broadening to benefit other industries - in particular, the services sector, which makes up two-thirds of the economy and employs the bulk of workers.

Data on the economy's performance in the third quarter hints at this broadening recovery, says DBS senior economist Irvin Seah.

The economy grew 5.2 per cent in the July-to-September period from a year earlier - its strongest quarterly showing since 2013.

While the bulk of this growth was driven by manufacturing - for which output surged 18.4 per cent - the services sector expanded 3 per cent year-on-year, faster than the preceding quarter's 2.5 per cent increase.

Mr Seah notes: "A turnaround in the services sector will make the improvement in growth more sustainable."

The Ministry of Trade and Industry has upgraded its 2017 growth forecast to 3 to 3.5 per cent, from an earlier estimate of 2 to 3 per cent.

HSBC chief Asean economist Joseph Incalcaterra says: "What we've been seeing is a two-speed economy in Singapore, where the pick-up wasn't necessarily passing through to the domestic economy.

"Finally we're starting to see signs that this is ending, and growth is becoming more broad-based.

"Singapore's growth in 2018 will come from the continuation of the cyclical boost, albeit at a softer pace than in 2017, as well as broader underlying drivers."

Another strong year ahead?

The pace of economic activity could slow slightly next year, partly due to this year's high base.

But 2018 will also be the services sector's turn to shine, especially since manufacturers could find it tough to keep up last year's breakneck pace of expansion.

ING economist Rob Carnell says Singapore's economy "has already turned the corner" and is "moving up a gear in terms of activity".

"We're likely to see continued gains in the tradeable sector."

CIMB Private Bank's Mr Song says last year's rapid expansion in factory output "is probably not sustainable", but the sector is still expected to register robust growth of between 4 and 7 per cent next year.

Services sector growth has been lagging behind manufacturing but the gap should narrow in the coming quarters, he adds. He expects the economy to grow 3.7 to 3.8 per cent in 2018. "The pace is similar to 2017, but the contribution to growth will be more balanced - more of it will come from service-producing industries."

DBS senior economist Irvin Seah agrees that services could replace manufacturing as the key driver of Singapore's economy next year.

"Externally-oriented services industries are expected to do well in the coming quarters compared with the domestic services sector.

"Higher frequency data such as re-exports, container throughput, and financial market turnover are all trending higher."

Government forecasters expect economic expansion to moderate in 2018 compared with 2017; it is expecting growth of 1.5 to 3.5 per cent for the coming year.

Credit Suisse economist Michael Wan says the slight slowdown will be due in part to a dip in China's growth, which could dampen Singapore's exports. "Nonetheless, the expected strength in the US and European Union economies in 2018 should offset these drags to some extent."

Still, some manufacturers remain cheerful about prospects.

Mr Sam Chee Wah, general manager of precision-engineering firm Feinmetall Singapore, says sales went up 4 to 6 per cent this year and the company already has a strong order book for the first three months of 2018.

"This year, the industry as a whole did well - better than the year before. Activity is picking up strongly in sectors like precision engineering, biomed, mobile and automotive.

"This is partly due to new product launches, but also emerging trends like digitisation and the Internet of Things. Many companies are moving towards these technologies and this generates demand for sensors and data-tracking equipment.

"We are quite optimistic for the first half of next year."

Stronger SGD on the cards?

With the pace of economic expansion picking up both here and around the world, some economists think tighter monetary policy could be on the central bank's agenda next year.

The Monetary Authority of Singapore (MAS) uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth.

The rate is allowed to float within a band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflation by making imports cheaper in Singapore dollar terms, while a weaker Singdollar helps lift growth by making exports cheaper abroad.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" stance put in place in April last year amid slow growth and low inflation.

The MAS kept its policy unchanged at its review in October and has since reiterated that this stance remains appropriate.

But strengthening growth overseas means imported inflation could be on the rise, especially if oil prices begin to recover as some market watchers expect. A stronger currency would guard against this and help dampen inflation, which will also be under pressure from domestic factors such as a prospective tax hike.

Most economists and tax specialists are expecting an eventual increase in the goods and services tax, which last went up in 2007 and is low relative to Singapore's peers in the region.

Risks remain

However, there is still a risk that the economy could take a turn for the worse.

The ongoing manufacturing boom could turn out to be temporary and short-lived. Some segments of the economy remain soft; the construction industry, for example, has been shrinking for five straight quarters.

The MTI says in its statement accompanying third-quarter economic growth data: "Unlike most of the other sectors, the performance of the construction sector is expected to remain lacklustre, weighed down by the continued weakness in construction demand."

The job market has also not quite turned the corner, despite showing signs of recovery. Analysts have flagged an upward trend in the long-term unemployment rate for Singaporean and permanent residents in the past two years as a matter of concern.

It rose to 0.8 per cent in September, up from 0.7 per cent in June, going by figures released by the Ministry of Manpower (MOM). This rate measures the proportion of the resident labour force that has been unemployed for at least 25 weeks.

DBS' Mr Seah says the labour market still faces structural and transitional constraints: "Some jobs are disappearing as old industries fade. Automation and disruptive technologies could also reduce labour demand.

"And the new growth industries such as fintech, creative IT solutions, aerospace, robotics and advanced manufacturing are less labour-intensive than older manufacturing industries.

"Nevertheless, an improvement in growth momentum, particularly in the services cluster, should help to lift the labour market over time."

Longer-term worries

Singapore will have to look beyond short-term upticks in global demand to secure its economic future.

This means the hard work of restructuring and innovation must continue even amid this upturn.

OCBC economist Selena Ling says: "While the growth outlook is looking more sanguine, on the ground there is still a fair bit of weakness, especially among small and medium-sized companies.

"A lot of productivity growth has been manufacturing- and electronics -driven. In the services sector, however, there is still a lot of room for improvement."

Ultimately, being ahead of the curve in this era of disruptive change "will be what guarantees medium-term growth for Singapore and will underpin our next leg of growth, beyond this whole cyclical expansion story", she adds.

"If we settle for 1 to 3 per cent growth over the next five years, that will be undershooting our potential. I don't think that's the best that we can do."

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