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Singapore settles for slower growth for rest of decade

Outlook shaded by labour constraints, productivity challenges and uncertain global economy



FOR the rest of the decade, the Singapore economy will grow at a slower-than-expected pace of 2-4 per cent per year - a downgrade from the 3-5 per cent expansion initially envisaged.

This lowered forecast, reiterated by the Ministry of Trade and Industry (MTI) on Tuesday, came even as volatility continued to mark the Singapore economy: While Q1 GDP (gross domestic product) growth, at 2.6 per cent, beat even the most sanguine of forecasts, a sharp drop in pharmaceutical production last month sent manufacturing output plunging 8.7 per cent year on year in April - the largest fall in over two years.

The government's more tempered outlook (which applies to growth this year and until 2020) was first indicated by Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam in late April. He said at NTUC's May Day dinner: "Achieving even 3 per cent growth on average will be an increasing challenge, as our labour force slows down in the years to come."

The deceleration in workforce growth is premised not only on the continued tightness in foreign manpower policies, but also on the tapering of resident workforce growth.

The latter is due to the ageing population and limits to further increases in the labour force participation rate. According to projections by the Ministry of Manpower (MOM), resident workforce growth will drop to an average of 20,000 per year towards the end of the decade - a sharp slowdown from the growth of 66,000 on average in the last five years.

Supply-side factors aside, the revised medium-term growth forecast range also takes into account downside risks arising from an uncertain global economic environment, said MTI Permanent Secretary Ow Foong Pheng.

Indeed, the MTI cited a litany of factors behind the challenging external environment, including the continuing risk of a hard landing in China and deflation fears in the eurozone.

"If global economic conditions remain uncertain and sluggish for a protracted period of time, businesses' expansion plans, investment decisions and demand for workers may be adversely affected. Under such circumstances, workforce and productivity growth may come in lower than expected," said the MTI.

The ministry acknowledged that productivity growth "has been relatively lacklustre" thus far. Excluding 2010 - when productivity growth surged 11.6 per cent as the economy rebounded from the global financial crisis - productivity growth was weak at 0.3 per cent per annum from 2010 to 2014.

MTI expects to achieve the government's target of 2-3 per cent productivity growth per annum from 2009-2019, although figures are more likely to come in closer to the lower end of this range.

It also reiterated its view that productivity growth remains vital in ensuring sustainable economic growth and higher wages for Singaporeans.

Private-sector economists told The Business Times that the lowered medium-term GDP growth forecast range "makes sense" and is "more realistic", given the uncertain global economic outlook. They added that the government seems to be indicating its tolerance for a "new normal" in the economy.

Said Mizuho economist Vishnu Varathan: "I think they really want a risk-adjusted, coherent message about growth. This shows us that they're still quite comfortable with lower growth - they're not cringing and they're certainly not panicking, because this is in line with the broader objectives of restructuring."

Bank of America Merrill Lynch's Chua Hak Bin thinks the downward revision "reinforces how the government has no intention of relaxing the foreign worker supply constraints" in order to boost Singapore's growth trajectory. "It's just not going to happen. The lower growth (projection) reflects a new reality that companies will have to reckon with."

Although the downgraded GDP forecast range reflects only a one percentage-point shift, economists agree that the impact will still be felt.

Said independent economist Song Seng Wun: "Any time a slower growth projection happens, there will be implications and a trickle-down impact on businesses - be it for turnover, demand for labour, expansion plans . . . Fresh graduates may have to be more realistic with their wage growth expectations, although the tight labour market will help to keep pay adjustments up."

Dr Chua agrees. He thinks companies serving the domestic market - especially property firms - will see business being more subdued compared to a decade ago.

Even so, Mr Varathan thinks that impact on sentiment will be limited. "I think it will have very little bearing for those in the real economy, because they already know there's going to be quite a bit of volatility ahead. We've known that growth is going to be subdued, so I think people are already pricing in to some extent the fact that a pick-up in growth back towards 5 per cent is not a given."


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