Singapore: Designing the future in the midst of uncertainty Asia Pacific Economic Outlook, Q3 2017

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The Singapore government has a vision of transitioning to higher-value-added industries, and thus boosting productivity, by focusing on skill development, innovation, and global integration. However, this process is likely to face both external and internal challenges.

Introduction

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Singapore’s real GDP growth has slowed in recent years. Average annual growth rate in 2016 and 2015 was less than half that in 2014 and 2013. The slowdown links back to sluggish global trade—a critical factor driving Singapore’s economic performance. However, the recent uptick in global economic growth and business sentiment is spurring an improvement in global trade. This is likely to support slightly quicker real GDP growth in Singapore in 2017. While an improving external economic environment is important for the near term, the overarching narrative over the medium to long term will remain centered on Singapore’s internal transition to its future vision of the economy. The Singapore government is planning a transition to higher-value-added industries by focusing on skill development, innovation, and greater global integration. This assumes importance as low-skilled, low-cost manufacturing and services are more likely to shift to developing economies in Asia with abundant labor pools. The planned economic transition also focuses on boosting productivity, especially because Singapore’s population is aging rapidly. This process is likely to face both external and internal challenges.

The Singapore government is planning a transition to higher-value-added industries by focusing on skill development, innovation, and greater global integration.

A review of recent economic performance

In 2016, Singapore’s real GDP grew 2.0 percent from a year ago, about the same as in 2015 (figure 1). The manufacturing sector recovered in 2016, growing 3.6 percent after declining 5.1 percent in the previous year. Manufacturing growth was supported by growth in the electronics cluster and the biomedical cluster, particularly in the final quarter of the year. Electronics manufacturing was supported by growing demand for semiconductors due to a cyclical upswing in the global information technology industry. The biomedical cluster was supported by an increase in demand for pharmaceuticals and medical equipment. Growth in the construction and services sectors of the economy moderated in 2016 compared with 2015. The goods-producing and services sectors of the economy each contributed 0.7 percentage points to overall real GDP growth. Ownership of dwellings and taxes on products accounted for the remainder.1

Consumption, both private and government, slowed relative to the previous year. Private consumption grew just 0.6 percent, down from 4.6 percent in 2015. Gross fixed capital formation declined in 2016 after weak growth in the previous year. Exports and imports also slowed relative to the previous year. Exports of goods and services grew 1.6 percent, down from 2.6 percent in 2015.2

Real GDP growth and global trade

In Q1 2017, Singapore’s economy contracted 1.3 percent quarter over quarter on a seasonally adjusted annualized basis. Manufacturing declined from the previous quarter, but the electronics cluster continued to be buoyed by strong demand. Construction recovered relative to the previous quarter but remained weak relative to a year ago due to continued weakness in private construction. Service industries also declined relative to the previous quarter.3 Total exports, measured in constant 2012 Singapore dollars, declined from the previous quarter, but exports in the first four months of 2017 were up 5.7 percent relative to the same period a year ago.4

An uptick in global trade and Singapore’s plan for growth in the future

In its latest World Economic Outlook (WEO) report, the International Monetary Fund (IMF) indicates that global GDP growth is likely to strengthen to 3.5 percent in 2017 from 3.1 percent in the previous year.5 Brighter prospects for economic growth in developed economies, particularly in the United States and European Union, are important factors behind the projection of quicker global growth. Additionally, quicker economic growth in the first quarter of 2017 in China has temporarily allayed fears of a sharp slowdown there. Another factor behind the improved outlook is improving business sentiment, backed by improved corporate earnings.

Indicators such as the container throughput index, international air freight volumes, and the global PMI all point to improving global trade in the near term.

All these factors augur well for global trade. In the WEO forecast, global trade volume is projected to increase 3.8 percent in 2017, up from 2.2 percent in 2016.6 Other indicators, such as the container throughput index, international air freight volumes, and the global purchasing managers’ index (PMI), all point toward improving global trade in the near term (figures 2a and 2b). Even the World Trade Organization’s World Trade Outlook indicator notes that global trade momentum is likely to continue at a moderate pace through the second quarter of 2017.7 The uptick in trade is likely to benefit Singapore’s economy in the short run. With trade (exports and imports) accounting for 320 percent of GDP,8 robust global trade will remain critical to the success of Singapore’s future economic plans.

Container throughput indexGlobal manufacturing PMI

The Singapore government has put in place a focused strategy to maintain economic growth. This strategy includes building workforce skills, developing industry transformation maps, enhancing innovation, enabling digitization, and deepening international connections. The government has targeted five clusters for growth: advanced manufacturing, applied health sciences, smart and sustainable urban solutions, logistics and aerospace, and Asian and global financial services. These clusters are areas in which Singapore has existing comparative advantage; they are also areas where the government projects will generate demand in the future.

As Singapore attempts to move up the value chain, it is also moving away from a reliance on low-skilled, low-wage foreign labor. The government has set quotas for foreign workers in certain sectors. Furthermore, businesses are required to pay a tax on each foreign worker employed, dependent on the worker’s qualification as well as the foreign worker quota imposed on the sector. Tax rates are lower if the worker has the necessary academic and skill-based qualifications. The quota and tax system is designed to regulate the number of low-skilled foreign workers in Singapore, boost wages, and increase overall productivity by encouraging skill development.

As Singapore attempts to move up the value chain, it is also moving away from a reliance on low-skilled, low-wage foreign labor.

Likely challenges to Singapore’s transition strategy

Singapore’s planned transition to an economy of the future comes with challenges. First, there are external challenges; the momentum in global trade could be dampened if developed countries adopt a protectionist stance. Global policymakers are beginning to show some concern about this. For example, the IMF’s WEO report states that pressures for “inward-looking�? policies are growing in the developed world due to low productivity and income inequality.9 China’s broad slowdown also poses a risk. Improved growth in Q1 2017 is unlikely to reverse the broad slowdown in growth. Weaker global trade could hamper Singapore’s plans of both achieving growth through export-oriented future growth clusters as well as fostering deeper international connections.

There are internal challenges to the plan as well. At the top of the list is Singapore’s aging population. Increasing life expectancy and a decreasing fertility rate mean that Singapore’s population will have an increasingly large proportion of old people. The old-age support ratio (OASR) is the ratio of working-age Singaporeans (20 to 64 years) to those 65 years and older. The OASR in 2016 was 4.7. By 2030, the OASR is likely to fall to 2.3.10 While an aging population is one of the reasons behind Singapore’s transition strategy, it is also likely to deter future growth, especially since the focus is on boosting productivity rather than expanding the workforce, which would put the city-state’s infrastructure under strain. Unfortunately, productivity growth has been weak and has been outpaced by growth in average monthly earnings (figure 3), though an improvement in Q4 2016 offers hope. Year-over-year growth in output per employed person has averaged just 0.5 percent over the last eight quarters.11 Year-over-year growth in average monthly earnings averaged 3.6 percent over the same period.12

Labor productivity and monthly earnings growth

The short-term outlook

Singapore’s short-term economic outlook will be determined by the future path of global trade. Trade policies in the developed world as well as fiscal and monetary accommodation in China are key factors in the near to medium term. If trade momentum holds up, then business sentiment is likely to rise, which, in turn, will support business investment. Budgetary measures such as expanding tax rebates and providing support to businesses faced with higher wage payouts are also likely to lend support. Furthermore, starting public sector infrastructure projects early is likely to compensate for weak private sector construction spending in the near to medium term. Singapore’s private consumption expenditure, which has stalled in recent quarters due to low consumer confidence and rising labor force redundancies, is likely to remain subdued in the near term. However, improved access to on-the-job training and likely gains in real wages due to a tight labor market could help improve spending in the medium term.

Despite some favorable developments, real GDP growth in Singapore is unlikely to be significantly higher than in the previous couple of years. The Ministry of Trade and Industry forecasts growth of between 1.0 and 3.0 percent in 2017.13 This is likely to be the new normal for Singapore as it grapples with an uncertain external environment and internal structural challenges in its transition to an economy of the future.