As risks loom large, growth takes an uncertain course

Singapore

THE Singapore economy is officially expected to grow 2-4 per cent this year: the exact same forecast as a year ago for 2014. But this range could mean either a pick-up in growth or further slowdown in 2015 - and it's anyone's guess given the diverse range of risks to growth, both domestic and external. [Infographic: Calm or choppy?]

Advance estimates last Friday put Singapore's 2014 growth at 2.8 per cent - in the lower half of the government's forecast range and significantly slower than 2013's 3.9 per cent. For now, market economists expect some improvement in 2015, with a median forecast of 3.2 per cent growth this year.

This is largely premised on the view that the US economy's strength will power demand for exports, compensating for weaker growth in Singapore's other key trading partners: the eurozone, Japan and China. A year ago, US growth was still tepid, and recovery slow.

Some analysts are also optimistic that the recent plunge in oil prices - Brent crude fell to a new 5.5-year low of under US$56 last Friday - could serve as a growth catalyst for major net importers of oil such as the US, Japan, India and China.

However, recent global economic indicators show that some of the risks which the Ministry of Trade and Industry (MTI) said in late November could undermine its 2015 forecast are looming large.

Growth forecasts across the eurozone have been cut, its latest manufacturing purchasing managers' indices point to more weakness and economists expect inflation to have dipped again in December, feeding fears that the eurozone economy could fall into a deflationary spiral.

There are those who think these dangers could be contained.

"With uplift in the US economy, expectations for more easy-money policies from the European Central Bank (ECB) and Bank of Japan (BOJ) to prop up their economies, and China maintaining a steady course even as the economy continues to restructure, we believe that the external risks from these countries will be manageable," UOB economists said in their outlook report for Q1 2015.

Indeed, Japan has already passed a US$29 billion stimulus package to spur growth and analysts think falling inflation could force the BOJ to ease policy further this year. ECB president Mario Draghi on Friday also hinted that aggressive stimulus is around the corner, to fight the eurozone's dangerously low inflation.

However, this very divergence in global monetary policies creates its own risks, other economists point out. Already, uncertainty over when and how quickly the US Federal Reserve will hike interest rates is raising concern over an unexpected move hitting financial markets and business sentiment.

With major central banks moving in opposite directions, interest rate expectations will fluctuate and currencies will be volatile, with significant impact on financial markets too, said DBS economist Irvin Seah. And the ripples from such volatility will inevitably be felt in small, open Singapore, he added.

Other external risks include the possibility that China's ongoing property market correction may take a sharper turn, causing mortgage defaults to spike - which could slow China's growth further. Unlike a year ago, MTI has also flagged downside risks from ongoing geopolitical tensions and the possibility of a global Ebola outbreak.

Domestically too, challenges from last year have been carried over into the new year. The labour crunch continues, with a final round of foreign worker quota cuts and levy hikes due to hit employers in July.

The construction sector will still face a double whammy of manpower constraints and a slowing property market. Citi economist Kit Wei Zheng estimates that the 10-15 per cent decline in house prices that he anticipates could shave 0.4-0.6 per cent off headline GDP growth this year, via weaker construction investments alone.

And while the pain of economic restructuring intensifies, the productivity gains that should offset higher wage costs have yet to materialise, five years after the push towards productivity-driven growth began. Singapore experienced negative productivity growth of -0.5 per cent in the first three quarters of 2014.

Higher US interest rates expected this year could filter through to Singapore rates and dampen consumer spending, which is possibly already slow due to the negative wealth effect from falling home prices, said Manu Bhaskaran, founder of economic consultancy Centennial Asia.

"Barring a huge boost from global demand that could offset these domestic adjustments, the domestic economy will remain a drag, and may even worsen," Mr Bhaskaran wrote in a recent note. But as long as the global economy holds up, Singapore should be able to absorb the costs of domestic restructuring to grow a modest 3 per cent, he said.

INFOGRAPHIC: Calm or choppy?