While Singapore’s external environment still faces many downside risks, some bullish economists say 2018 headline economic growth could come in at between 3 and 3.5 per cent. This would be the economy’s best showing in four years and would build on the strong full year 2017 performance, which has already seen several surprises to the upside in recent quarters.
The technology and biomedical manufacturing clusters have done well, with manufacturing output recording their strongest gains in 7 months in July and August this year. “At this juncture, the external demand is stronger than expected, while the broader manufacturing sector is looking better and that is spilling over into the services sector,” said Song Seng Wun, regional economist at CIMB Private Banking.
Barring unexpected outcomes in the global economy and key sectors in the domestic economy for the rest of the year, the government’s central view is that gross domestic product (GDP) growth for 2017 is likely to come in at around 2.5 per cent, within the narrowed range announced in August of 2-3 per cent.
Still, private sector economists appear more bullish at this point. “For 2017, we are looking at about 3 to 3.5 per cent growth, and for 2018, I think a very likely possibility would be the 2 to 4 per cent range,” said Selena Ling, Head of Treasury Research and Strategy at OCBC. “There could be some upside, but it is still dependent basically on how China manages its growth deceleration and some of its policy challenges in how it manages its renminbi and capital outflows,” said Ms Ling.
Possible elections in Malaysia and Thailand in 2018 could also affect risk appetite for the region.
CIMB’s Mr Song also said the Singapore economy could grow in the 2-4 per cent range in 2018 but thinks that a headline rate of around 3.5 per cent is possible if expected upsides come through next year. “The property sector has been seeing good sentiment, the domestic-oriented industries have also been getting a lift, while the labour market is expected to bottom out where the jobless rate is concerned,” said Mr Song. If these predictions come to pass, the Singapore economy could well be seeing its best performance in four years.
The last time the economy grew over 3 per cent was in 2014 when it expanded by 3.6%, say observers.
Looking ahead, economists predict the key growth drivers in 2018 will likely come from the services sector, such as financial services, wealth management, business and professional services, as well as tourism-related services. “If you look at regional growth, it has been fairly resilient, and monetary policy has not really had much of a dampening effect for this part of the world,” said Ms Ling. “As far as Asia is concerned, China is still growing and concerns over anti-globalisation or anti-trade initiatives coming from the West have also faded with time,” she added.
The manufacturing sector, which makes up about a quarter of the economy, could be supported beyond technology manufacturing by other sub-sectors such as chemicals and transport engineering.
The hospitality sector may also be boosted by higher visitor arrivals.
“Tourist arrivals have been very strong, whether it is from the Chinese market or the Indian market, so all those actually suggests that there could be a fairly benign growth environment in 2018,” said Ms Ling.
But Mr Song said not all sectors and industries in Singapore will do well. “We all know the shipyards are not in the best of health, and the other segment that is struggling is accommodation and food services,” he said. Data from the statistics office show the F&B Services Index for the restaurant segment contracting 9 per cent on year in the first half of 2017 after adjusting for price effects. “This means the local restaurant segment is on track for the third year of contraction, the longest period of slump for a non-recessionary period,” said Mr Song.
For 2018, economists say there should be caution over the potential downside risks. For one, the geopolitical environment is far from stable although markets have started to factor in some aspects of major developments such as Brexit.
Central banks, for their part, may be considering actions on monetary policy. “Central banks may be looking to tighten monetary policy, given early signs of improving economic conditions. The potential for energy costs to fall due to an increasing focus on renewable sources could pressure the economy,” said Mr Song. Given the growth and risk factors on balance, economists expect the Monetary Authority of Singapore (MAS) to maintain its current monetary policy stance at its October monetary policy meeting.
But a “normalisation” of monetary policy is expected as early as April 2018. “We expect the MAS to leave out the word ‘extended’ in their upcoming October 2017 policy statement but still remaining dovish, in order to allow time for the market to price in the potential appreciation in the next meeting,” said UOB in a report to investors.
In its October 2016 policy statement, MAS had said that “a neutral policy stance will be needed for an extended period to ensure medium-term price stability.”
UOB said it has adjusted its forecast for the Singdollar to be around at 1.38 to the US dollar by end 2017, in line with the consensus prediction for this period. This represents an appreciation of the Singdollar from around 1.40 per US dollar previously.
CIMB’s Mr Song said, “If headline GDP surprises on the upside as we now expect, that could be reason for the MAS to shift from its neutral bias to a tighter monetary policy.”