Singapore in 2020: Cyclical recovery, long-term challenges aplenty
This past year has been a rough one for Singapore. The economy was largely moribund and the global environment appears to be turning increasingly difficult for a small and vulnerable country such as Singapore. The key question for the city state in 2020 is whether it can nurture the adjustments needed to bolster its economy in the years ahead.
We believe that there has been too much pessimism about the near-term prospects — an upside surprise to economic growth in 2020 is within reach, though with a bit of luck. Beyond next year, Singapore is more at risk than others from trends at the global level such as the US-China strategic conflict, growing protectionism and nationalism, and disruptions ranging from technological ones to climate change. But even here, Singapore has some inherent strengths — with the right adjustments, it can carve a space for itself even in a rough and turbulent world.
Defining the challenge for Singapore: grim global trends…
The economy will probably end the year with growth below 1% — the slowest pace since the global financial crisis. Exports have contracted and investment has been lacklustre, suggesting that businesses lacked the animal spirits to make a bet on the future by expanding capacity. Surprisingly, this lack of oomph was also evident among consumers. Despite a still-tight labour market and improving household debt dynamics, consumer spending has been losing momentum significantly since the beginning of 2018.
Other developments brought plenty of bad news for a small and open economy such as Singapore’s.
The US and China — both important economic partners who exert substantial strategic influence as well — were engaged in bitter trade disputes. This trade war created so much uncertainty that firms around the world froze their expansion and hiring plans, causing a general global slowdown that dragged down Singapore’s trade dependent economy.
Worse still, the rules-based global trade regime that protects small countries such as Singapore was dealt a severe blow. The World Trade Organization’s dispute settlement system has broken down, which means that aggrieved countries have little effective recourse if they suffer illegal trade restrictions imposed by trading partners. This is an open invitation for large powers to bully small powers in trade matters:
There are no two ways about it; there will be a substantial increase in trade protectionism in 2020.
The trade dispute between the US and China is only a symptom of a larger strategic conflict between the two powers that will almost certainly last for decades. While the “phase one” deal agreed recently will prevent a downward spiral into an outright trade war, it will do little to avert a slide into other “wars”, many with serious economic consequences. We have already seen this in the US policy on Chinese technology firms such as Huawei Technologies, which brings the risk of “technological bifurcation” where the tech world is split into two — a US-dominated one and a China-dominated one. That would make life uncomfortable for small countries, which will be pressed to choose between the two big powers. Another flashpoint could be a currency war — the US Treasury could accuse China and other Asian countries such as Singapore of manipulating their currencies to gain an unfair advantage in exports.
More generally, the multilateral approach to solving global problems seem to be falling by the wayside. For example, in the latest climate change talks in Madrid, the nations of the world failed to agree on how to contain global warming.
…but a resilient domestic scene
The slowdown in economic growth was not as bad as it might have been. The Singapore economy had niches of resilience that helped it continue to grow even in the face of considerable global headwinds. This reflects some helpful changes in the economy:
• Although manufacturing contracted, some segments such as pharmaceuticals did well, showing the benefits of Singapore’s diversification away from excessive reliance on a single segment such as electronics;
• Within the domestic economy, firms are investing in information technology, which helped to sustain growth in the information and communications sector. In the longer term, this investment should also see a more competitive economy;
• The construction sector has put aside almost three years of contraction and is growing at a steady if unexciting pace;
• The tourism sector has also done better than expected, partly owing to conventions and conferences being diverted from protest-hit Hong Kong to Singapore; and
• Although fiscal policy might have been unduly restrictive, the Monetary Authority of Singapore eased monetary policy, providing some policy support for the economy.
Economic growth could be better than expected in 2020
After a year of near stagnation, things are starting to look up. The composite lead indicator rose in the third quarter, a good portent for the economy to regain steam in 2020. The purchasing managers’ indices also showed a pickup. Going forward, we see a number of positives in the external environment that could boost exports:
• The US-China trade deal should temper business concerns about a damaging trade war — the improvement in business confidence in turn is likely to allow some of the capital spending that was put on hold to now go ahead;
• There is also more evidence that China’s economy is regaining momentum. Purchasing managers’ surveys show a considerable improvement in the private sector’s confidence and activity while the pipeline of infrastructure projects to be implemented by local governments in 2020 is growing;
• Moreover, the electronics cycle, which is still key to Singapore’s manufacturing sector, is also showing signs of recovery. Excessive inventories have been managed down, prices are stabilising and underlying demand is growing again, aided by developments such as the 5G rollout and the expansion of data centres; and
• Finally, economic activity in Southeast Asia has a very good chance of revving up strongly. In Indonesia, Thailand, the Philippines and Malaysia, infrastructure spending is set to spring back from a disappointing pace in 2019. Production relocation out of China has clearly accelerated, with Vietnam, Malaysia and Thailand — all important partners for Singapore — benefiting the most. Interest rates have been cut in all these countries as well.
As the external picture brightens, we are also likely to see domestic factors contributing positively.
• Note that construction contracts awarded have risen, a good lead indicator for construction activity to continue gaining traction;
• A turnaround in investment will be key.
The World Trade Organization’s dispute settlement system has broken down, which means that aggrieved countries have little effective recourse if they suffer illegal trade restrictions imposed by trading partners
Investment in plant and equipment has been lacklustre in recent years but is showing signs of edging up. If we smoothen out fluctuations in net investment commitments (which fell sharply in the third quarter but have generally been on an upward trend), these commitments bottomed out in early 2018 and have been rising since. This rising trend should support capital formation in the quarters ahead; and
• Another big question has been fiscal policy. Singapore has generally adopted a rather conservative fiscal policy, accumulating substantial surpluses over the years. By some measures, the fiscal impact on the economy has been negative or at best a tiny positive. Many assume that the budget in February 2020 will follow this track. However, it is the last budget in this government’s term and it makes sense for some of the accumulated surpluses to be shared with the citizenry in some fashion. Prime Minister Lee Hsien Loong has promised a strong budget that, while abjuring standard fiscal stimulus, will focus on addressing education, ageing and climate change. We think that the budget will boost demand in 2020.
All in all, we think 2020 could be a year of modest improvement in economic growth.
What about beyond 2020?
That being the case, what about the longer-term picture, particularly in view of the great challenges identified above? Since we know the challenges, let’s look at the good news. In essence, there are three factors that remain in Singapore’s favour:
First, as mentioned above, production is being relocated out of China at an increasing pace, with our hinterland being the biggest beneficiary. This trend is likely to persist over many years. One reason is that China is moving up the value chain, and moving low-technology and labour-intensive activities out of the country makes sense since it releases much-needed labour, land and capital for the growing needs of higher-value activities. Chinese firms are selectively moving production abroad for this reason. A second reason is that the US-China strategic conflict will deepen and that means more and more businesses will want to have production clusters outside China to get around likely American restrictions on Chinese-made products and technology. While Singapore will see very little production moved to its shores, it will still gain as manufacturing activity speeds up in the region as a result. There will also be big gains for our import-export firms that procure components for factories around the region. Our aviation, port and financial services will also enjoy spillovers.
Second, could Singapore gain from the potential troubles that might affect the major global hubs of London and Hong Kong? If UK Prime Minister Boris Johnson is really serious about pushing for a swift withdrawal of the UK from the European Union by December 2020, then it is likely that the initial agreement with the EU will not include a final deal on complex financial and other services — that could hurt London’s competitiveness. As for Hong Kong, it is difficult to see an early end to the protests that have undermined its economy and raised concerns about its value proposition going forward.
However, it is important to understand that large global hubs are actually quite resilient. They tend to have a cluster of interlocking activities, each of which depends on the others. It is not easy for a large financial institution or MNC to simply shut down major operations and move to another location. Both cities also have business and technocratic leaders who will not sit still as threats to their cities loom — they will move aggressively to defend their positions and to offer global businesses incentives to remain.
Nevertheless, we still believe that Singapore will enjoy some benefits. Highly talented professionals and entrepreneurs are also highly mobile. If they feel that a given city is no longer as convenient or as welcoming, they can move quickly. Singapore should benefit from an infusion of Hong Kong and mainland skilled professionals, as well as some Europeans, that will nourish Singapore’s value proposition as a great global hub for business and finance. And for that reason, we could also see some talent-hungry activities being shifted to Singapore as well. With China’s growing oversight of Hong Kong affairs causing concern to some wealthy families, Singapore could also see its wealth management industry gain further against its rivals.
Third, long before the global environment turned difficult, Singapore had been investing heavily in economic partnerships that can now help buffer it in a world of growing protectionism and nationalism. So far, Singapore has 13 bilateral free-trade agreements and 11 regional FTAs under its belt. The bilateral FTA with the EU — still the single largest market in the world — has just come into effect. These economic partnerships cover countries that account for close to 75% of global economic output. Negotiations for another five FTAs are underway. Singapore is a member of the 11-member Comprehensive and Progressive Trans-Pacific Partnership as well as of the recently concluded Regional Comprehensive Economic Partnership. Protectionism will probably worsen in the coming years, causing the overall growth in world trade volumes to slow — these FTAs cannot prevent the negative impact on Singapore but will at least mitigate the damage.
Conclusion: A tough year but Singapore can overcome the difficulties
Our view is largely positive, not because we downplay the downside risks from US-China frictions or from protectionism or technology disruptions, but because Singapore has developed some buffers that can protect it reasonably well. Singapore has not got everything right and there is still a need to address a range of policy issues that this column has raised concerns about before — but there is enough going well for it to allow a cautious optimism about its future.