Asia Investment Club

The Singapore macroeconomic outlook – Lent 2018

Once a small fishing village with poor living conditions, Singapore has progressed to be one of the most highly developed free-market economies in the world. It has the third highest per-capita GDP in the world regarding Purchasing Power Parity (PPP), low tax rates, most pro-business and is ranked 17th for the countries with the lowest unemployment rates. With a population of 5.607 million (2016) and to have only existed for 53 years, economists agree that Singapore is a booming nation. But what does the economic situation look like in 2018?

Singapore had a dramatic economic position in 2017, where they were on the brink of a recession in Q1. However, in Q3 economic growth peaked at its fastest rate (5.2%) in the past decade. This strong positive growth rate is fuelling optimism and confidence amongst firms, stock monitors and economists about growth forecasts for 2018. This sudden growth can be acclaimed to the surge of global demand for electronic gadgets. Economic analysts predict that this will continue to drive growth in 2018.

There has been a total turnaround in the manufacturing market for semiconductors in the economy. New consumer electronics releases, including new mobile phone models, fuelled a pick-up in global demand for semiconductors and related equipment. Song Seng Wun says, “The manufacturing sector likely expanded around 11% in 2017, making it the best performer by far; this was also its strongest pace of expansion since 2010.”

The recent spike in global demand recovered the export market, improving the balance of payments and as a result trade promotion agency, IE Singapore had to revise its forecast for non-oil domestic exports (Nodx) upwards. Nodx, Non-Oil Domestic Exports, is predicted to rise from 6.5% to 7%, from an earlier estimate from 5% to 6%. If this does happen, Singapore will experience the highest growth rate of Nodx in the past seven years.

However, this demand-driven lift is only short-term, and this demand surge will soon fizzle out. So what are some long-term growth prospects for Singapore?

Recent data shows us that this growth is likely to move into other industries. In particular the service sector, which makes up 73.4% of the economy and employs 83.5% of labour force. Trends from Q3 of 2017 indicate a broadening recovery, says DBS senior economist Irvin Seah.

The economy grew 5.2% in the July-to-September period from a year earlier.

While the bulk of this growth was driven by manufacturing – for which output surged 18.4% – the services sector expanded 3% year-on-year, faster than the preceding quarter’s 2.5% increase. Mr Seah notes: “A turnaround in the services sector will make the improvement in growth more sustainable.”

As a result, The Ministry of Trade and Industry has updated its 2017 growth from 3 to 3.5%, from an earlier statement of 2 to 3%.

HSBC chief ASEAN economist Joseph Incalcaterra says: “What we’ve been seeing is a two-speed economy in Singapore, where the pick-up wasn’t necessarily passing through to the domestic economy. Finally we’re starting to see signs that this is ending, and growth is becoming more broad-based. Singapore’s growth in 2018 will come from the continuation of the cyclical boost, albeit at a softer pace than in 2017, as well as broader underlying drivers.”

“Many different sources state 2018 will be a strong year for Singapore. However economic activity is likely to slow down due to 2017’s high base. ING economist Rob Carnell says Singapore’s economy “has already turned the corner” and is “moving up a gear regarding activity.” “We’re likely to see continued gains in the tradable sector.”

Mr. Song, an employee at CIMB Private Bank, says the rapid expansion is not sustainable. However, economists expect that the sector will experience growth of 4-7% this year. Economic history tells us that there has been a widening gap between the tertiary and the secondary sectors. Mr. Song states this gap will narrow over time as factors of production substitute into the different industries and start producing more in the tertiary sector.

Irvin Seah also agrees that the services sector will match or even overtake the manufacturing industry as a critical driver for the Singaporean economy.

“Externally-oriented services industries are expected to do well in the coming quarters compared with the domestic services sector. Higher frequency data such as re-exports, container throughput, and financial market turnover are all trending higher.”

Forecasts made by the government suggest that economic expansion will be lower in 2018, than in 2017; it is expecting growth of 1.5-3.5%. The slowdown in growth can be explained by the fall in China’s development, eroding the value Singapore’s exports. This reduces the (X-M) value which then causes a decrease in aggregate demand for goods and services in the Singaporean market. Overall, the real value of output will fall if this theory takes place.

However, as a counter-argument, Credit Suisse economist Michael Wan says, “Nonetheless, the expected strength in the US and European Union economies in 2018 should offset these drag to some extent.”

Still, confidence is very high in manufacturing firms. For example, Straits Times stated, “Mr Sam Chee Wah, general manager of precision-engineering firm Feinmetall Singapore, says sales went up 4-6% this year and the company already has a strong order book for the first three months of 2018.” He then also says he is very optimistic about the future of their sales, as he has seen many multinationals moving towards such technology, which just boosts demand for his services. This is what the general trend is with manufacturing firms in Singapore.

As the economy is expanding, forecasters predict the value of the Singaporean dollar will strengthen. The Economy Forecast agency, predicts the value will increase by 5.5%. A stronger currency counters inflation by making imports cheaper in SGD terms. Although this is beneficial, other countries are growing at an exponential rate, which could mean imported inflation could be on the rise. This is especially the case if the price of oil increases, which market observers are saying. However, if the currency remains and does not fluctuate, it could counteract this imported inflation.

Although high economic growth can be beneficial to an economy, there are also negative consequences. Statista has predicted that inflation rates in Singapore 2018 will be 1.29% higher than in 2017. In theory real wages should be lower, as there are limited trade unions with weak bargaining power workers should receive lower real wages. However, ChannelNewsAsia stated that real wages should expect a rise of 2.7%. A recent poll demonstrated that employers are willing to raise salaries by 4% in 2018. With real wages rising, Singapore should experience a higher level of spending coupled with higher economic growth.

There are still many risks involved with economic prosperity in 2018. The dramatic increase in growth could be short-lived. Segments, such as construction still remain soft in the economy. It has shrunk consistently for five quarters as there has been a continual decrease in the demand for construction.

Despite signs of recovery in the labour market, analysts have seen an upward trend in long-term unemployment. The Ministry of Manpower (MOM) has predicted that long-term unemployment will increase by 14%.

“And the new growth industries such as fintech, creative IT solutions, aerospace, robotics and advanced manufacturing are less labour-intensive than older manufacturing industries. Nevertheless, improvement in growth momentum, particularly in the services cluster, should help to lift the labour market over time.”

Based on these macroeconomic trends and data, Singapore in 2018 is expected to experience higher economic growth and development. But will the surge in demand for electronic products be short-lived? Or will the forecasters predict the future? Time will only tell.


  1. Lots of great macro analysis here. One question: what’s the best estimate of Singapore’s current output gap? Presumably that rapid GDP growth (especially in manufacturing) means the amount of spare capacity is shrinking fast.


    1. Yes you are correct. The rapid GDP growth has increased so quickly that actual GDP and potential GDP are very close to each other. The best estimate of the output gap is 0.08% relative to the GDP. Hence, there is very little slack and spare capacity in the economy. Forecasters, predict that actual GDP is likely to rise further which means the Singaporean economy could overheat.


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