Improved growth dynamics and the ongoing recovery in global trade mean a higher growth forecast of 2.7% for Singapore’s gross domestic product (GDP) in 2017, according to ICAEW’s latest Economic Insight: South East Asia report. However, growth will remain uneven across sectors due to differing external and internal factors.
Building on a positive growth story in the first quarter, the outlook for the ASEAN economy remains cautiously optimistic. Strong performers like Malaysia and Thailand drive the region’s growth, while momentum eased in Singapore, Philippines, Vietnam and Indonesia. Overall, Southeast Asia’s forecasted growth will slip back towards 4.5% by Q4 2017, with full year GDP growth expected to be slightly higher than 2016.
“Following the positive Q1 outcomes, we have increased our growth outlook for some Asian economies, including Malaysia and Thailand,” says Priyanka Kishore, ICAEW Economic Advisor & Oxford Economics Lead Economist.
“However, we are cautious owing to various restraints on the region’s Q1 boost. We expect a slowdown in growth momentum under the influence of a widespread slowdown in exports in Asia and despite steady domestic demand – two essential factors underpinning the region’s strong performance earlier this year.”
Domestic factors remain a drag
Singapore’s growth contracted by 1.3% quarter-on-quarter in Q1 2017, understandably as a pullback from an impressive acceleration growth of 12.3% in Q4 2016. Moving forward, sectors dependent on external factors can expect a brighter outlook.
A modest recovery in business investment may soon be underway, as business loans rose to 8.1% year-on-year in Q1, the strongest growth in loans since 2014.
In addition, exports growth in Singapore will firm up after April’s low. Exports data point to a bumpy recovery as April’s Purchasing Managers’ Index was only slightly down from the 26-month-high seen in March, with new export orders still solid. However, a moderation in Chinese import demand following the strong bounce in Q1 2017 will see growth in exports easing over the coming quarters.
On the other hand, sectors dependent on internal factors will need more time to get back on track. The current unemployment rate – the highest since 2010 - will only improve later this year when financial services and the oil- and gas-related sectors pick up.
A recovery for falling house prices is also unlikely in the near future with the current supply overhang in the housing market, even with the recent easing of restrictions in areas like mortgages and stamp duty. As a result of these negative wealth effects, growth in private consumption and household spending is expected to remain relatively subdued.
“We are confident that an improved external environment will help sustain Singapore’s growth – despite the drag from domestic factors,” says Mark Billington, Regional Director, ICAEW South East Asia. “Moving forward, we expect domestic demand to remain the primary driver of growth. As the recovery in external global trade remains unsteady, we envisage ASEAN nations using more fiscal stimulus to support domestic demand.”
Slowdown in exports
Exports started Q2 on a low note, with this trend present in both Northeast and Southeast Asia (along with India). Key economies, including China and Singapore, also observed an easing in their export volumes growth.
There is limited scope for further monetary easing to stimulate domestic demand due to a combination of factors such as bottoming out inflation, high debt levels, financial stability concerns, impaired monetary policy transmission, and a desire to keep some policy space in case of external shocks.
There is also a lack of political will to explore options with expansionary fiscal policies.
Vietnam returns to growth target as FDI rises
Steady medium-term growth is forecast to reach an above-trend 6.7% in 2017-2018, driven by the rise in foreign direct investment (FDI) and local investments.
Stronger export growth (to China & ASEAN partners) continues to affirm Vietnam’s growing role as an outsourcing destination and low-cost food and industrial supplier.
Some risks to the forecasted growth of the country include an existing high fiscal deficit, an undercapitalized banking sector, potential trade partner problems from the shelved Trans-Pacific Partnership (TPP) and growing anti-Chinese sentiment.
Increased public spending accelerates Malaysia’s growth
Malaysia and Thailand’s performance drove the region’s strong performance in Q1 2017. Malaysia’s GDP growth was boosted by a rebound in public spending. The rapid growth in export volumes was offset by a surge in imports, with net exports subtracting 2.9% points from its quarterly GDP growth.
Malaysia, along with Philippines and Indonesia, is expected to hike rates in the coming quarters.