The Singapore economy is expected to decelerate in the second half to bring full year 2016 growth to 1.9%, according to research from Natixis.
The report notes that credit growth should continue to contract despite improvement of liquidity conditions.
“Structurally, Singapore faces labor shortages, exacerbated by low fertility rates and an aging population. The share of working age population to total is declining, putting pressures on Singapore’s competitiveness,” notes the Natixis research.
The number of working age population in Singapore will peak in 2020, according to United Nations estimates, and contract rapidly by 2% per year thereafter. The pace of contraction will accelerate rapidly. This is one of the reasons for wage growth, although slowing, to exceed overall inflation in the economy, which has been negative this year (and in 2015).
This erosion of wage competitiveness will put pressure on Singapore to raise productivity or loosen immigration policy.
The good news is that Singapore has policy options, according to Natixis. The Monetary Authority of Singapore (MAS) has recently chosen to let the currency weaken, as expected, to support the economy.
Due to high savings rate helped by a large current account surplus and still decent relative yield, liquidity conditions are also improving. Thus, the MAS is trying to manage a delicate dance between low interest rates and trying to keep the currency competitive (although still expensive in our opinion). Interest rates will likely remain low to support the domestic sector.
Global demand is weak, dragging down prices of commodity and manufacturing. As a result, Singapore export-oriented sectors are hurting, from petrol to transport equipment.
Even after stripping out oil and non-domestic exports, shipments still declined by double digits in July 2016.
Consequently, the manufacturing sector has not contributed much to growth since H2 2014. And outlook is not bright into H2 2016 either, given still subdued China demand and lackluster imports elsewhere.
Added to the burden is an expensive SGD, which has eroded external competitiveness. For example, Chinese tourist arrivals into Singapore already contracted in July to - 1.5% YoY.
While manufacturing has played a significant role in the economy, making up 20% of total production, services have become a key anchor of growth in recent years. Within services, business services, wholesale and retail trade, finance and insurance, and transport and storage make up the bulk of the total, 15%, 14%, 12%, and 7% respectively.
Although the sector has been the key support for the economy, it is also cracking under pressure as declining trade income is spilling over to services. Its contribution to YoY GDP growth declined (grey column). Whether it is business services, wholesale and retail trade, finance and insurance, or transport and storage, declining trade activity is feeding through into the service sector with a lag.