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 rising 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 last year, 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 inflow 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. It expects the economy to expand 2.3 per cent this year and 2.5 per cent next year, up from 2 per cent last year.
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 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 US interest rate hikes, could hit households and companies with high debt levels.
On the domestic front, uncertainty surrounding ongoing restructuring could hold back investment and 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 ageing-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, such as bringing forward infrastructure investment and expanding existing budget transfers to targeted groups to boost domestic demand and address the large external surplus. There is also scope to strengthen Singapore's permanent social insurance arrangements, including introducing time-bound unemployment insurance.
In its response, 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 Government said. Withdrawing these programmes will be difficult when the need for them abates.
On unemployment insurance, the 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, job-matching help and means-tested support.
