Thursday 30 October 2014

Monetary Authority of Singapore's sobering take on Singapore economy 2014

GDP and productivity growth to remain constrained; core inflation to stay above historical average
By Kelly Tay, The Business Times, 29 Oct 2014

THE Monetary Authority of Singapore (MAS) has presented a sobering prognosis of the Singapore economy - GDP expansion will continue to be muted, productivity growth will remain constrained, and core inflation will stay above its historical average on the back of labour cost pressures. The manufacturing sector, too, continues to face difficulties from land and labour constraints, although one positive is that companies have been moving up the value creation chain successfully.

In reiterating its 2014 GDP growth forecast of 2.5-3.5 per cent in its twice-yearly Macroeconomic Review on Tuesday, the central bank also sought to put it in perspective: "This should be seen in the context of the domestic economy settling down to a slower, but more sustainable growth path. With Singapore's relatively high real GDP per capita of US$61,000 (S$77,723) and labour productivity of US$99,700 on a purchasing power parity-adjusted basis (as at 2013), the moderation in the medium-term growth rate is in line with global experience."

In response, UOB economist Francis Tan said: "I see this as the MAS trying to temper growth expectations, to remind people to be more realistic. An abundance of labour is no longer part of the equation, so we won't be seeing growth of 6 or 7 per cent any longer."

Looking ahead, the MAS said that a "broadly similar" pace of growth is expected in 2015, and that the Singapore economy is "on track for moderate growth" despite some external and domestic headwinds. It qualified, however, that the performance across sectors will be uneven. "Sectors that cater to final demand in the US will fare relatively favourably, while those that are tied to the eurozone and China could be weighed down by the sluggish performance in these economies. Concomitantly, some of these external-facing industries will continue to grapple with resource constraints and falling product prices.

"Meanwhile, domestic-oriented sectors will remain resilient on the back of firm underlying demand, although those segments that are more reliant on labour input, or face greater competition, could experience profit margin pressure," said the central bank.

Still, beyond 2015, Mizuho economist Vishnu Varathan isn't ruling out a growth performance better than 2.5-3.5 per cent: "Apart from the external crosswinds highlighted by the MAS, we also have a domestic economy still undergoing restructuring, which is a major change. So you can't really decide how you're going to look when you're still in the changing room ... As we innovate with our regional services, we could very well see a significantly higher pace of growth in the next few years."

As for the manufacturing sector, the MAS noted the industry's "continuous evolution", with the most recent phase of change marking a shift from mass production, to higher-margin niche production and services. It is particularly optimistic about the prospects of the electronics and information & communication sectors, expecting "a healthy pipeline of investments" to boost output in the near to medium term.

On the productivity front, overall labour productivity fell by 0.3 per cent year-on-year in the first half of 2014, after rising by 0.8 per cent in the second half of 2013, due to the weak performances of the services and construction sectors.

As such, Singapore's unit labour cost (ULC) rose more significantly by 3.1 per cent in H12014, compared to 1.2 per cent in H22013.

Said the MAS: "Productivity growth will be constrained in the short term, given the lack of a strong cyclical rebound. It will also take time for firms to reduce their reliance on workers, especially in construction and services. Accordingly, ULC is expected to rise moderately in the near term, even with government subsidies, such as the Wage Credit Scheme."

The MAS added that strong labour demand will continue to butt up against labour supply constraints, keeping wage growth firm; the economy-wide resident wage growth is expected to be around its 10-year historical average of 3.7 per cent in 2014 and 2015. Therefore, domestic cost pressures - mainly stemming from the tight labour market - will remain the "primary source" of inflation.

Summing up its outlook on the Singapore economy, the central bank said: "Resource constraints amid intermittent external headwinds will temper growth, but as firms leverage more intensively on capital and skills, the transitional costs during the adjustment phase will ebb. Higher productivity and more capital-intensive modes of production will provide a firmer basis for Singapore's future growth prospects."

Wages rise, but growth in productivity stalls
Locals snap up most job vacancies as labour costs climb amid tight market
By Chia Yan Min, The Straits Times, 29 Oct 2014

THE local share of total employment gains in the first half of 2014 (73%) was higher than in the full-year of 2011 (31%) .

Nearly three out of every four jobs created in the first half of the year went to locals, said the Monetary Authority of Singapore (MAS) in its latest macroeconomic review released yesterday.

It also said the tight labour market will continue to drive up wages and employment for Singaporeans, although it also means that firms are increasingly passing on higher costs to consumers.

The share of new jobs filled by locals shot up to 73 per cent in the first six months of the year - far higher than the 31 per cent in the full year of 2011.

This follows multiple rounds of foreign labour tightening measures implemented as part of ongoing restructuring efforts, which aim to raise labour productivity.

But four years into economic restructuring, progress remains slow.

Labour productivity inched up just 0.2 per cent a year from 2010 to last year.

Productivity fell 0.3 per cent in the first half of this year over the same period last year, dragged down by the weak performance in the service and construction sectors, the MAS said. In the same period, resident wage growth came in at 3 per cent "with no cost offset from productivity".

Higher wages led to unit labour costs rising 3.1 per cent from January to June, compared with 1.2 per cent from July to December last year.

Productivity growth will be constrained in the short term, given the lack of a strong cyclical rebound in the global economy, the MAS said.

"It will also take time for firms to reduce their reliance on workers, especially in construction and services," it added.

This means labour costs will continue rising in the near term.

Businesses in the food-related sectors and labour-intensive services, where demand remains firm and labour constraints are most binding, are more likely to pass on the higher costs to consumers.

Meanwhile, competition and tepid global demand have kept a lid on price increases in export- dependent sectors.

The MAS said it expects core inflation - a measure of the rise in everyday out-of-pocket costs - to remain elevated into the next year, even as overall inflation numbers remain relatively subdued.

Core inflation averaged slightly over 2 per cent in the first three quarters of this year.

Overall inflation is set to be 1 per cent to 1.5 per cent this year, while core inflation is forecast at 2 per cent to 2.5 per cent.

"Since the balance of risks remains slightly tilted towards higher core inflation, the prevailing monetary policy stance continues to be optimal in ensuring domestic price stability over the medium term," the MAS said in its review.

Earlier this month, the central bank said it will stick with its policy for a relatively strong currency.

Singapore conducts monetary policy by managing its exchange rate against a basket of the currencies of its major trading partners.

A stronger Singdollar helps to dampen inflation by making the prices of imported goods lower.

Step up productivity amid slowdown
By Fiona Chan, Senior Economics Correspondent, The Straits Times, 28 Oct 2014

THIS year has been a tough one for Singapore's economy, for reasons that were summed up in recent remarks made by the International Monetary Fund (IMF).

She flagged the risk of a "new mediocre", where worldwide growth stays low and uneven for a protracted period - hurting economies that rely on external demand, such as Singapore.

Two weeks later, the IMF sounded another alarm, cautioning that Singapore's policy of moderating foreign worker inflows could dampen the nation's potential growth and competitiveness. The resultant tighter labour supply, on top of an ageing population, would also likely push wages up more quickly than productivity, it added. Companies would pass on these higher costs by raising prices for consumers.

The IMF's observations pinpoint two main issues plaguing Singapore's economy: a global economy that has failed to get back on track post-crisis, and a productivity drive at home that has struggled to take flight.

While Singapore can do little about the former, it can step up efforts on the latter. This has become especially urgent as the double blow of flagging demand and supply constraints is starting to show up more clearly in growth and inflation data here.

Figures this month showed Singapore's economy grew just 1.2 per cent in the third quarter over the second. That marks three straight quarters where the economy has expanded 2 per cent or less over the preceding quarter - the longest period of such tepidity since the 2008 financial crisis.

As DBS economist David Carbon notes, these numbers imply that the state of the economy is actually "much weaker than the 2.5 to 3 per cent full-year average figure that everyone bandies about".

Mr Carbon is referring to official full-year growth forecasts, which tip the economy to grow a better-sounding 2.5 to 3.5 per cent both this year and next year. Most economists believe growth will come in at the poorer end of that range, at 3 per cent or lower.

This would be possible once growth in all four quarters is averaged out - but such a calculation "makes it plain how misleading" these full-year average figures can be in the face of weak quarterly growth, said Mr Carbon.

He estimates that, if no revisions are made to the growth numbers in the first three quarters, the economy would need to grow 6 per cent in the fourth quarter to reach 3 per cent full-year growth.

But even 3 per cent would be at the bottom of the range Singapore set its sights on after starting its restructuring drive in 2010.

At the time, such a target seemed achievable. From 2000 to 2009, Singapore's economy grew an average of 5.3 per cent a year, despite suffering through two recessions during the bust and global financial crisis.

Part of this was due to a generous foreign worker policy in the boom years of 2004 to 2007, allowing Singapore to capitalise on robust global demand that sent growth soaring nearly 9 per cent a year on average in that period.

Still, even after tightening the tap on foreign workers in recent years, the Government believed the economy could grow a "healthy" 3 to 5 per cent a year on average from 2010 if it managed to raise labour productivity by 2 to 3 per cent annually.

Of course, growth would vary each year depending on the global economic outlook, it said. But Singapore should do better than most advanced nations, which typically grew 2 to 3 per cent a year.

Four years on, these numbers are looking a bit outdated. Developed economies have grown below 2 per cent nearly every year since 2008 and are forecast to expand just 1.8 per cent this year.

Singapore's productivity, meanwhile, has moved along at the pace of a tired snail. Between 2011 and 2013, productivity gains have averaged 0.2 per cent a year; in the first two quarters of this year, productivity has fallen 0.3 per cent on average.

As the IMF has noted, the combined impact of these is not just lower growth, but higher prices.

The good news is that overall inflation has been coming down in recent months, largely due to government measures to temper soaring house and car prices.

But core inflation, which strips out accommodation and private transport costs and is a better gauge of daily expenses, will likely be 2 to 2.5 per cent this year and 2 to 3 per cent next year - nearly the same as economic growth.

In fact, the gap between economic growth and core inflation is now at its smallest since at least 1990, save for recession years.

This situation of low growth and elevated prices can create discomfort for workers and consumers. If inflation rises as much as or more than dollar wages, that means real salaries - adjusted for inflation - stay flat or even fall.

In recent years, incomes have managed to outpace overall inflation on average. But for that to continue, Singapore must position itself to maximise economic growth and temper price rises.

Against the current dismal global outlook, Singapore cannot rely on external demand alone to buoy its growth. And even when demand does pick up, the new manpower constraints here mean the economy cannot profit as quickly or as much from upswings in overseas markets as in the past.

The pressure in on for the 10- year productivity drive to succeed, so businesses can use technology, training and innovation to fulfil more orders, construct more buildings or engage in higher-value economic activities with fewer workers. This will require a stronger buy-in from companies. A recent survey found that of nearly 3,000 small and medium firms polled, only half were relooking their business models in the light of the ongoing restructuring.

If they don't get on board, the alternative is grim. As the IMF put it: a successful restructuring can set the stage for a new era of sustainable growth, albeit with some interim pain.

It left the next obvious part unsaid: If restructuring fails, the pain of lower growth and higher core inflation may be here to stay.

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