'Keep calm and carry on' as Singapore economy slows

It has been a stormy start to the year, with volatile stock markets and plunging oil prices. Faced with a challenging external environment, the Singapore economy will also see a slowdown of growth to between 1 per cent and 3 per cent this year. Ahead of Budget 2016, The Straits Times takes a closer look at the slowdown in a series of stories over the next fortnight.

M Metal's managing director John Kong says his priorities are to continue exploring ways to innovate and grow his business.
M Metal's managing director John Kong says his priorities are to continue exploring ways to innovate and grow his business. PHOTO: ALICIA CHAN FOR THE STRAITS TIMES
Companies here have been suffering weaker demand and thinner margins, even as they grapple with a tight labour market and rising business costs. ST PHOTO: KUA CHEE SIONG

Building supplies firm M Metal is no stranger to the woes plaguing small companies here - rising business costs, an acute manpower shortage and thinning margins.

Despite these challenges, the company's revenues have remained resilient - until now.

For the first time in five years, M Metal will likely experience a drop in earnings this financial year, says managing director John Kong.

"We are squeezed on both ends. On one end margins are down, but on the other I can't hire more labour. We have not laid off people, instead we have frozen employment. I don't want to retrench staff because if I do it affects their entire family," says Mr Kong. "So we've cut down our operating hours, cut down on some overtime."

His woes reflect a slowdown spreading across the Singapore economy. Mounting global uncertainties - over the fate of economies like Europe and Japan as well China - are hitting exports and weighing heavily on sentiment closer to home. This means companies here have been suffering weaker demand and thinner margins, even as they grapple with a tight labour market and rising business costs.

The Singapore economy grew at a modest pace of 2 per cent last year, but many expect things to take a turn for the worse this year. The 2015 growth rate was already the weakest Singapore has experienced since the global financial crisis.

The Ministry of Trade and Industry (MTI) has warned that the outlook for 2016 worsened in the first few months of the year, amid further slides in global oil prices and financial market volatility. It expects growth this year to come in within the 1 per cent to 3 per cent range.

"We're heading into a cold winter, mainly because of the uncertain and challenging global environment," says DBS economist Irvin Seah. "We're not getting enough lift from the United States. Even though we're seeing some improvement from the euro zone, it has never been a key driver for the Singapore economy. We're also facing more drag from China."

While Singapore is not yet headed for a full-blown recession, economists are warning of stormier weather and more bad news ahead.

"It is not the sudden shock scenario we faced in 2008 when the rapid ripples from the Lehman collapse were felt," said Barclays economist Leong Wai Ho. "The current episode feels like a much slower, but more persistent, negative spiral of confidence, spending and activity."


The manufacturing sector, which makes up a fifth of Singapore's economy, has been hit hardest by the slowdown and resulting tepid demand for exports. The sector has been in recession for at least a year, with no reprieve in sight.

Manufacturing contracted 5.2 per cent last year, a reversal from 2014's 2.7 per cent expansion.

The slowdown in China, combined with Chinese and US companies turning away from imports, will result in further pain for Singapore manufacturers this year.

"In a global downturn, manufacturing is always the first to suffer... This year we will see the full impact of the manufacturing slowdown, with some spillover to the services sector," says UOB economist Francis Tan.

While there are some bright spots within manufacturing - such as the volatile biomedical cluster, as well as chemicals - these have been far outweighed by poor showings in segments like electronics as well as marine and offshore. Electronics, which makes up a third of manufacturing output, shrank 6.8 per cent last year. Transport engineering, which includes marine and offshore, contracted 13.5 per cent on the back of the global oil price rout.

The oil and gas industry is in "structural dislocation" worldwide, says Mr Seah. "It's not just the rigbuilders but the entire value chain... The impact is more broad-based than what the numbers are suggesting." For instance, many precision engineering firms service the oil and gas industry and are feeling knock-on effects from the slowdown.

Mr Timothy Owyong, a planner in the petrochemical industry who helps to determine the cost estimate for services, such as maintenance and repairs of a plant, against market prices, says the plunge in global crude prices has been weighing heavily on sentiment. "There are several areas where I'm feeling the heat," he adds. Some multinationals have shuttered plants here, including a polycarbonate resin plant owned by Japanese firm Teijin, notes Mr Owyong. And the exit is bound to have knock-on effects on other firms, vendors and partners that do business with them.

The job losses also mean "an abundant number of employees for companies to pick and choose from, and salaries in the short to mid term would be depressed in our sector", adds the 36-year-old.


The services sector proved relatively resilient last year and helped support growth even as manufacturing faltered, but economists are less sanguine about the 2016 outlook especially as sentiment keeps heading south. The sector, which makes up two-thirds of Singapore's economy, grew 3.4 per cent last year.

"Services have held up well despite the drag from manufacturing but we're not sure if that can be sustained in 2016 given the increasingly uncertain global environment," says DBS' Mr Seah.

The financial services sector, for instance, is likely to face more headwinds this year. The industry, which employs more than 200,000 people here, "is in consolidation mode" after having been an important driver of services growth for the past few years, adds Mr Seah.

Singapore's banking sector is expected to continue shedding jobs this year following news of job cuts by Barclays in January and Standard Chartered in November, as foreign banks scale down their Asian presence to cut costs.

"Bonuses and increments have been bad in the industry these few years," says a banker who was among those laid off by Barclays.

Sentiment-sensitive segments like trading have also been "stung by rising risk aversion", as Singapore equities have lost $42 billion in value since the start of the year, says Barclays' Mr Leong.

Other services segments like logistics have also been hit by the slowdown - growth in the transportation and storage cluster flatlined last year as world trade continued to falter.

Meanwhile, the tourism industry has picked up slightly from a trough in 2014 but the outlook remains uncertain. While tourist arrivals have ticked upwards, "it's hard to say whether tourism will be a bright spot this year", says UOB's Mr Tan.

"Tourists might be more discerning about spending this year given the outlook. If there's more currency volatility, that may also dampen demand from Chinese and Indonesian visitors," he notes.

However, Mr Tan points to bright spots in the services sector such as education and healthcare, both of which are expected to remain resilient despite the slowdown. These sectors, which are domestic and linked to demographic needs, could even grow with more government spending, he adds.

This would be similar to what is being done in the construction sector. Government spending on infrastructure has helped to prop up the industry amid a private sector slowdown.

And this year's projects include the new National Cancer Centre, PUB's water reclamation and sewerage works, Changi Airport's three-runway system, and the remaining contracts for the Thomson-East Coast MRT line.

At the same time, a Monetary Authority of Singapore report published last week said high-value "modern services" will play a bigger role in driving growth this year. "Notably, demand for information and communications services is expected to be firm, with the Government's Smart Nation initiative... providing the boost," it said.

Meanwhile, some say the current climate is not all doom and gloom.

Singapore International Chamber of Commerce chief executive Victor Mills feels there is cause for "plenty of cautious optimism".

While business sentiment has been hit by a slew of dreary statistics, he says the fundamentals of doing business here are still strong.

"We are in the midst of transforming our economy that has been growing in a particular way. It is painful, it will take time. I don't think people believe it should be taking so much time, or be necessarily as painful as it is in terms of adjustment. But it's not a bad thing because some of the concerns could be due to a sense of complacency, which may be reduced during this period of slow growth."

Mr Mills notes the Committee on the Future Economy aims to complete its work at the end of the year.

"This tells you the key message is to keep calm and carry on. If it was like 2008 during the global financial crisis when the sky appeared to be falling or the end of the world was nigh, we would see much faster intervention by the Government."

But there are worries that the economic slowdown is not a sudden drop as was the previous crisis, but a slow drift that could sap Singapore's economic vitality.

While the economy is not in the midst of a "doomsday scenario", UOB's Mr Tan says the current slowdown "might be a long-drawn one".

"For the past two years growth has been sluggish... We could see an L-shaped instead of a V-shaped recovery. This might result in consumption and investment being constrained, and would limit the economy's potential growth rate."

But Singapore's economy has been extremely resilient in the past, rebounding strongly after each downturn. The economy contracted 2 per cent in 2009 but soared 14.5 per cent a year later.

Likewise following the Sars and bubble-fuelled recessions in the early 2000s, the Singapore economy went through a sustained period of solid growth.

Things may be slightly different now with an ageing workforce and limited land resources, but Mr Chan Chong Beng of Workforce Advancement Federation, which helps small and medium-sized firms, says companies which survive will emerge in a stronger position to weather future slowdowns, noting that these are cyclical in nature. "We urge companies to invest in their human assets, to take this time and train their employees if there are fewer jobs. And hopefully they can be paid higher salaries and be retained when the economy recovers."

The Budget, due to be delivered by Finance Minister Heng Swee Keat on March 24, may also offer some relief but the aid is unlikely to amount to much, says Bank of America Merrill Lynch economist Chua Hak Bin. It will likely focus on the longer-term challenges and the push to restructure the economy, a theme unchanged from recent Budgets, economists add.

Mr Heng said on Friday that the focus will be on the economy in this year's Budget and will look to offer some help for firms to get through the difficult short-term patch. "We have to continue to focus on what we need to do - to manage in this slower growth environment but at the same time to focus on what are the medium-term opportunities that we continue to have," he said.

For businessmen like Mr Kong of M Metal, there is no time to pause but to keep calm and carry on.

His priorities are to continue exploring ways to innovate and grow his business. "What is important, to keep morale high, is communicating the situation to the staff, taking stock of where we are and what we need to do together," he says of his 30 employees. "If your employees see that you care, they will put in that extra effort... even if it may not result in a pay rise this year."

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A version of this article appeared in the print edition of The Straits Times on March 07, 2016, with the headline 'Keep calm and carry on' as Singapore economy slows. Subscribe