Chia Yan Min And Fiona Chan

Restructuring squeeze amid slow growth

The New Year parties are over, but Singapore's economy is still suffering a hangover from 2014.

A potent mix of plummeting oil prices, a lacklustre global economy, the prospect of higher interest rates and domestic restructuring pressures is expected to dampen the economic outlook in 2015.

"There's been a change in the date but the prospects are similar and the risks remain," said CIMB economist Song Seng Wun.

So what are the prospects for the different sectors and the macroeconomic outlook?

Mixed mood in manufacturing

Looking at the year ahead, economists say the lethargic global economy will remain a weight on Singapore's factories and exports.

The outlook for the euro zone and Japan remains moribund, while China's growth is slowing. One bright spark is the strengthening United States economy, which is expected to boost global growth this year. United Overseas Bank economist Francis Tan said this should lift manufacturing segments which export mainly to the US, like semiconductors.

Trade agency IE Singapore is tipping growth in exports of between 1 per cent and 3 per cent this year. This is up from a decline of 0.68 per cent in the first 11 months of last year, and a 6 per cent contraction in 2013.

However, restructuring is still taking its toll on manufacturers, who have been struggling with the tight labour market and rising business costs, said DBS Bank economist Irvin Seah in a research note. The "only saving grace" for manufacturers is the falling price of oil and other commodities, which might provide some breathing room, he added.

Growth in the manufacturing sector is likely to languish until the second quarter, when a pickup in global economic conditions is expected, said Mr Seah.

Slowdown in services

The service sector will not be spared the effects of heightened global volatility and increased uncertainty, Mr Seah added.

Tepid regional trade will slow down transport and wholesale trading, while financial and business services will bear the brunt of asset market swings. The tourism industry will also continue to be weighed down by slowing visitor arrivals from China, he said.

The ongoing labour crunch is the service sector's most pressing concern. Supply-side constraints will result in service firms missing out on opportunities both in Singapore and abroad, said UOB's Mr Tan.

Softening construction

The property downturn and some delays in government-funded infrastructure have weighed on building activity, dragging down the construction sector's growth for a few quarters.

These trends will continue this year, said DBS' Mr Seah. "We don't see any unwinding in the property market cooling measures until interest rates rise."

Higher levies for foreign construction workers will further crimp growth. "Construction companies will have their margins squeezed, with revenues not improving significantly and costs persistently rising," Mr Seah said.


With oil prices still plumbing multi-year lows and the housing market expected to stay soft, Singapore may continue to flirt with deflation - defined as a fall in consumer prices - this year.

Overall inflation here dropped below zero last month for the first time since the global financial crisis in 2009, and some economists believe this trend could persist for a few months.

Citi economist Kit Wei Zheng said last month that inflation could stay "near zero" for the first six months of this year.

But Barclays economist Leong Wai Ho pointed out that the absence of inflation applies only to overall prices. Core inflation, which excludes private road transport and accommodation costs and is seen as a better gauge of everyday expenses, is likely to stay in positive territory.

"We expect core inflation to be higher than headline inflation and the divergence to widen," he said.

Indeed, the Government tips overall inflation of just 0.5 to 1.5 per cent next year but "firm" core inflation of 2 to 3 per cent.

Still, the lessening of inflationary pressures could give the central bank some room to ease monetary policy, although that may not happen unless a more significant drop in prices materialises, said Mr Kit and Mr Leong.

If the Monetary Authority of Singapore relaxes its stance of a gradual appreciation in the Singdollar this year, it would be for the first time since April 2012.

Restructuring and labour productivity

Companies will continue to feel the squeeze from ongoing restructuring efforts, which have been under way since 2010, as the Government tightened foreign labour supply. This has raised business costs for some companies, and constrained others' ability to expand.

Although tighter foreign worker supply was meant to drive up productivity, such an outcome hasn't materialised. Labour productivity dipped 0.5 per cent in the first three quarters of last year, after falling in both 2012 and 2013.

But companies might get some respite in costs. CIMB's Mr Song noted that rentals are moderating amid a soft property market and utility bills are declining due to lower global oil prices, so "almost every aspect of costs with the exception of wages will be slightly more favourable".

Wage growth will be modest even in a tight labour market, as global growth is tepid, he said.

So where does this leave the Singapore economy in 2015?

Most economists seem to agree that this will not be an easy year - in the latest MAS poll, they tipped 3.1 per cent growth for 2015, down from their earlier estimate of 3.7 per cent.

Making predictions has always been a risky business, but one thing does seem clear - it will be a bumpy year ahead for Singapore's small and trade-dependent economy.