SINGAPORE - Singapore's economic outlook continues to be clouded by global uncertainty over the next few quarters, and it will have to turn to domestic drivers for growth this year, said the Monetary Authority of Singapore (MAS) on Friday (April 26).
"This will be led by the ongoing expansion in services arising from the digital transformation of the economy and the recovery of the construction sector," the central bank added at its twice-yearly macroeconomic review.
Barring a significant setback in global growth, MAS reiterated that it expects full-year growth for Singapore to come in slightly below the mid-point of the 1.5 per cent to 3.5 per cent forecast range in 2019.
As slower growth in Singapore's key trading partners continues to weigh on the economy, contribution from trade-related sectors is expected to recede.
"Instead, modern services will be the key driver of growth, as digitalisation and innovation-driven activities continue apace," said MAS.
"Meanwhile, domestic-oriented sectors such as construction and consumer-facing services are expected to stay on a recovery path."
While analysts are looking to a trade deal between the US and China in May or June, expecting some rebound in the second half of 2019, Maybank Kim Eng economist Chua Hak Bin cautioned that the recovery may remain weak.
“Even if there is a trade deal, we know it’s going to be an ongoing review and I suspect a lot of businesses will still tread very carefully,” he told The Straits Times.
While he agreed that modern services will be a key growth driver, he added: “We have to recognise that it is also cyclical and sensitive to external conditions.”
Loan growth for example has been coming off, he said, adding that some trading activities have been slowing as well even as other areas like infocomm appear to be bucking the trend.
ING chief economist Robert Carnell said that while digital activities is a fast-growing part of Singapore’s economy, “it’s going to take some time before it really off-sets some of the slowdowns we are seeing in the more conventional parts of the economy such as electronics and manufacturing”.
“It’s good to have, but I’m not sure it is a complete airbag when the economy is hitting the skids in other areas,” he said.
He noted, however, that there appears to be greater acknowledgment of the external environment’s impact on Singapore in the MAS’ latest review: “Should the need arise, I think there’s less resistance to the concept of perhaps reversing some of the earlier policy tightening that has been put in place, and remains in place.”
The Republic has seen a step-down in growth in the fourth quarter of 2018 and first quarter this year, mainly driven by weakness in the trade-related cluster, alongside a downswing in the global electronics cycle.
Slowing activity in trade-related areas was most evident in manufacturing, which contracted 1.9 per cent year-on-year in the first three months of 2019, marking its first quarterly decline in three years. Global trade volumes began shrinking towards end-2018 as well.
Pockets of weakness also emerged in the modern services cluster, which includes firms providing financial and technology services such as in banking and cyber security.
Financial intermediation, which can involve bank loans, has been bogged down by the slowing Chinese economy and maturation of the global economic cycle, while heightened uncertainty in the external environment has "cast a pall over sentiment-sensitive segments like security dealing and fund management", said the MAS.
In the region, weakening domestic demand in China began to weigh more on Asian economies in the second half of last year and this is expected to continue in the first six months of 2019.
There are, however, nascent signs of recovery in Singapore's domestic-oriented cluster.
In particular, the MAS highlighted that the construction sector grew 1.4 per cent in the first quarter, expanding for the first time in 10 quarters.
This positive push is expected to continue for the rest of 2019, given a recovery in contracts awarded since the second half of 2017, with industrial projects such as JTC's upcoming developments in the Punggol Digital District providing a boost.
The MAS sounded an optimistic note on the support from digital activities as well.
Even as traditional growth drivers in modern services are likely to weaken this year, the authority said digital-related activities, comprising IT and information, as well as payment services, should see growth extend firmly into the quarters ahead.
"Activities of payment services players should continue to pick up as Singapore progresses towards a more cashless society," said MAS, noting that competition will add to growth momentum.
Elsewhere in modern services, information and communications technology, as well as business services, will benefit from Singapore's ongoing push towards a Smart Nation, with public investment in digitalisation providing a further boost in these areas.
Outside of Singapore, MAS expects the global economy to expand at a slower pace this year, although growth momentum is showing signs of stabilisation in the near-term.
This is helped by increased policy support in China and a loosening in financial conditions both globally and in the United States.
Trade tensions between the superpowers continue to pose uncertainties, on top of weakening domestic demand in China.
Slowing growth in China is expected to hit the region, impacting Taiwan most severely and significantly affecting Korea, Malaysia and Thailand, said MAS.
While it remains to be seen if trade diversion from tariff hikes to Korea, Taiwan and Vietnam will be sustained, some Asian economies could benefit from a shift in production networks from China.
An MAS analysis of supply chain shifts in Asia found that as investment is redirected from China to the rest of the region, in the longer term, all economies in Asia will experience a gain in real income.
Indonesia, Malaysia, the Philippines and Thailand are expected to see the largest improvements, with advanced economies in Asia receiving smaller gains.