Econ­omy Watch

Man­u­fac­tur­ing re­mained as the main driver of growth, but a come­back from the tourism sec­tor gave the econ­omy a much needed boost.

Singapore Business Review - - CONTENTS -

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.

Man­u­fac­tur­ing surge

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.

Chal­lenges ahead

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

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