Manufacturing remained as the main driver of growth, but a comeback from the tourism sector gave the economy a much needed boost.
In mid-october, the Ministry of Trade and Industry released advanced estimates for the Singapore economy, indicating a
4.6% expansion for the third quarter of 2017—the city-state’s highest growth pace in more than three years. The estimates beat market expectations and not only assured markets that the upward momentum in manufacturing and services was not a fluke, but also revealed a key trend supporting Singapore’s recovery trajectory: tourists are flocking back to the country. Still, analysts warned that beneath the blaring headlines of impressive growth in exports and tourism, the domestic economy will likely remain subdued.
“The tourism sector appears to be reaping benefits from the government’s continued efforts to develop the sector and this is likely to be supportive of growth over the coming quarters,” said BMI Research. The research firm noted that visitor arrivals have been steadily increasing, and hitting multi-year highs such as the 1.63 million in August, topping the 1.62 million posted in July 2016.
“We expect the government’s continued programmes to continue to attract more tourists, and ongoing initiatives to improve the nation’s connectivity through the further development of Changi Airport should be positive for tourism,” said BMI Research.
Singapore launched a new tourism campaign slogan, Passion Made Possible, which positions the citystate as a more unique destination in Asia. The city-state’s tourism agency also recently signed a Memorandum of Understanding with China’s Alipay in an effort to woo mainland Chinese tourists. The two companies have agreed to cross-share relevant content about Singapore on various platforms,
with the goal of providing more awareness and travel information to mainland Chinese tourists, which represent 18% of all visitor arrivals last year, and is the second-largest foreign tourist group behind Indonesians, according to BMI Research.
The tourism rebound is helping fuel a broader economic recovery in recent quarters, driven mainly by a manufacturing surge, that has led analysts to upgrade their growth outlooks. In response to the marketbeating performance, BMI Research has upgraded their real gross domestic product (GDP) forecasts for both 2017 and 2018 to 3.2% and 3.0%, respectively, from 2.2% and 2.5% previously.
“The manufacturing sector will remain the main driver of growth, whilst still-strong tourism figures will lend additional support,” said BMI Research. Manufacturing continues to be the primary growth catalyst for Singapore in the third quarter of 2017, recording the fastest pace since the first quarter of 2011. More notably, manufacturing drivers have broadened beyond economics, including to precision engineering and biomedical manufacturing, said
Chua Hak Bin, analyst at Maybank Kim Eng.
After the advanced estimates in the third quarter were released, Maybank Kim Eng raised its GDP forecast to +3.2% in 2017, from +3%, and +2.5% in 2018, from 2.4%.
“Manufacturing growth will likely moderate from the spectacular pace, but remain at a healthy rate,” said Chua. “Services will contribute a greater proportion to growth, as the recovery broadens to the more
Maybank Kim Eng raised its GDP forecast to +3.2% in 2017, from +3%, and +2.5% in 2018, from 2.4%.
domestic-oriented sectors and manufacturing cools off.”
He also expected Singapore to upgrade its full-year GDP growth to 3.0% to 3.5%, from the current 2% to 3% range, in mid-november when the finalised third-quarter GDP is released given that growth has been averaging 3.3% in the first three quarters. The construction sector remained the weakest link in the Singapore sector in the third quarter, contracting 6.3%, pulled down by weak private sector activity, although Chua forecasted that construction growth will likely turn positive in 2018 on the back of stronger private sector works stemming from resurgent property sales.
Green shoots for property?
In the third quarter, the services sector also quickened its growth pace to 2.6%, an improvement from 2.5% in the second quarter, and there is a likelihood that this could be revised upward, aided by renewed property sector strength. “We think that services growth is coming in stronger than the flash estimates and will be upgraded when the finalised figure is out in November,” said Chua. “We think business services growth may also be stronger, given surging private residential sales and an upswing in the property market.”
One sign that the seeds of recovery have been sprouting in property is that private residential price index in Singapore rose 0.5% q-o-q in the third quarter, the first time prices have increased in four years since the Monetary Authority of Singapore (MAS) tightened macroprudential policies, pushing down prices of private units, noted Jingyang Chen, economist at HSBC.
“The rebound in prices of private properties confirmed our view that the recovery in property is gathering pace as the supply-demand imbalance normalises,” said Chen, expecting the growth of private residential prices to turn positive in the first half of 2018 due to tightened supply and robust demand. “Growth in Singapore continues to benefit from the improvement in global trade and the tech cycle underway in Asia since the end of 2016.
However, as we have noted many times previously, the improvement in exports has not fully passed through to the domestic economy,” said
Joseph Incalcaterra, chief economist at HSBC. “But green shoots for the property market are starting to emerge, albeit at a gradual pace.”
He expected the two-speed economy in Singapore to gradually improve next year on the back of a gradual recovery in the housing market, where new supply has peaked, optimism is rising and pent-up demand has boosted recent property launches. “Even so, the improvement in the domestic economy will be gradual,” said Incalcaterra. Alicia Garcia Herrero, chief economist at Natixis, said growth will be more even in 2018, compared to this year where, so far, external oriented sectors fared better than domestic ones such as private consumption. “A weak real estate market and subdued sentiment dragged demand [in 2017],” she said. “In 2018, we expect the real estate sector to find firmer ground, which will support a boost of private consumption. external sectors should continue to perform well, bolstered by higher oil prices and ongoing trade recovery,” she said.
On the medium-term horizon, Singapore’s growth in the coming years will be capped as domestic demand support remains limited and the city-state faces demographic challenges, said Juliana Lee, chief economist at Deutsche Bank.
She cited how Singapore’s fertility rate has remained well below the replacement rate of 2.1 for more than four decades, at 1.2% in 2017, which is forecasted to trigger citizen population shrinkage from 2025 and a working age population decline from 2020, based on a Population White Paper (PWP) published in 2013.
“The PWP referred to various policies to boost Singapore’s population, accompanied by infrastructure spending and construction of affordable, good quality housing, amongst others—a boon for construction investment,” said Lee.
“However, due to the popular sentiment against more liberal immigration policies—to be clear though, Singapore is one of the most open societies in the world—the government refrained.”
In tandem with the pressures of an ageing population, Singapore is grappling with weak wage growth, which was limited to 2.4% in the second quarter. These factors, including the heavy indebtedness of households, have weighed substantially on private consumption, according to Lee.
“Whilst labour market conditions have improved recently, the slack that had previously accumulated will take time to be fully absorbed, and wage pressures are thus unlikely to accelerate in the near term and other non-labour costs such as commercial and retail rentals will stay subdued,” said Selena Ling, analyst at OCBC.
“Even on the property front, the MAS view is that accommodation costs will continue to dampen headline Consumer Price Index in 2018, albeit to a lesser extent than this year, whilst the positive contribution of private road transport costs will fall as previous administrative measures dissipate,” she added.
Ling reckoned that the window for the adjustment on any monetary policy introuced by the MAS remains open in April and October 2018, it is still depending on how the economic and price stability picture evolves over the next six months. Although she noted that G7 central banks “are increasingly jumping on the policy normalisation bandwagon.”
In 2018, we expect the real estate sector to find firmer ground, which will support a boost of private consumption.
The tourism rebound is helping fuel a broader economic recovery in recent quarters