Why the sustainability of the economic growth is questionable
It may look like the Singapore economy is finally picking up with exports showing robust growth and GDP staying well above expectations. But as far as analysts are concerned, there is not much reason to cheer as these good-looking figures are questionable. “The Monetary Authority of Singapore acknowledged the uptick in external activity in its latest Macroeconomic Review and expects growth in 2017 to be anchored by trade-related sectors, mainly driven by It-related segments,” says Edward Lee, head of ASEAN economic research at Standard Chartered Bank Singapore.
“Nevertheless, the central bank also acknowledged that the pick up in manufacturing activity was driven primarily by the semiconductor and precision industry segments, stating that any recovery in the rest of the manufacturing sector likely remained patchy. We believe this phenomenon reflects a lack of broad-based demand behind the robust growth numbers. We have reiterated this view since the start of the year and remain cautious about the sustainability of such robust performance,” he adds.
On the contrary, Zhixiang Su, an economist at Morgan Stanley, believes that there may still be economic reasons for Singapore to resume popping the champagne. Potential GDP growth, he says, could average 3% over the 2016-2030 period.
Addressing labour force participation
According to Su, Morgan Stanley’s estimates are based on the following: they incorporate the Population White Paper assumption that working age population growth will slow to an average of 1.5% between 2016 and 2020 and 1.0% between 2020 and 2030. “However, we assume that policy efforts to combat the slowdown in immigration policy by lifting the labour force participation rate bear fruit. The labour force participation rate increases at a 20Y historical average run-rate, taking it from 67.7% in 2015 (de-trended) to 70.7% in 2030, as the higher dependency ratio, longer mortality, and rising re-employment age urge greater labour participation,” says Su. “This will lead growth in the working population to rise by 1.8% YOY between
2016 and 2020 before moderating to 1.3% YOY between 2020 and 2030 (versus a 20Y average of 2.8% YOY),” he adds.
In the near term, Su adds that he sees upside risks to his base case GDP forecast given how the cyclical recovery, driven by improving external demand and manufacturing output, is playing out. “Our bull case GDP forecasts for 2017/2018 are 2.3%/2.8%. Over the longer term, we think potential GDP growth in Singapore will average 3.0% for 2016-2030, which will still remain at a premium compared to other advanced economies. Our medium-term potential GDP growth estimate is in line with policymakers’ growth target as set out in the Committee on the Future Economy (CFE) report, which stands at 2-3% over the next decade. We elaborate on our potential GDP growth estimate below,” he explains.
He further explains that the improving economic outlook would help drive an inflection in home prices come 2018. “Property market bears expect slower population growth, an ageing population, and a structural growth slowdown to weigh on the long-term property market outlook. We disagree and believe home prices will double by 2030,” Su adds.