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Firms more pessimistic despite global recovery

Tight job market, higher costs seen limiting their ability to cash in on foreign demand

Companies also said that they are experiencing a harsher enforcement environment from tax authorities, particularly around transfer pricing, which they identify as the top tax risk - PHOTO: SPH

[SINGAPORE] What good is a global economic recovery if companies can't take advantage of the opportunities that arise from it?

Findings from the latest Business Times-UniSIM Business Climate Survey show that despite improving conditions worldwide, firms here are more pessimistic about their business prospects over the next six months compared to a quarter ago.

According to survey director Chow Kit Boey, the dimmer outlook was driven by bosses' concerns over rising cost pressures - especially those stemming from higher rents and wages - which continue to crimp margins here.

Together with some economists, Ms Chow believes Singapore firms may not get as much of a lift from the global recovery story as initially thought. After all, a tight labour market and higher business costs could limit a company's ability to capitalise on greater overseas demand.

Said Ms Chow: "I expected the results to be better than the previous quarter. If not for the rising business costs and labour constraints, I think the recovery (in business sentiment) would not have stalled."

Of the 150 companies which responded to the survey in late-March and early-April, 34 per cent expected business prospects to worsen, while 30 per cent said conditions will improve. The business prospects net balance - the difference between the proportion of sanguine versus pessimistic responses - fell three percentage points to one per cent.

While this may seem like a marginal difference, the findings must be taken in context. In the last quarter, the business prospects net balance jumped 15 percentage points to 4 per cent. This marked the first positive showing in more than 30 months and brought the previous BT-UniSIM survey report broadly in line with findings from official business expectations surveys.

This time around, though, the results do not seem to gel with the consensus narrative - where a global recovery is expected to boost Singapore firms' profits and economic outlook. But economists such as DBS's Irvin Seah are not surprised.

"I think a lift (from the global economy) will happen, but it's not going to be as strong as what people have been talking about. There are underlying structural problems here," said Mr Seah, who added that as much as productivity has to be raised, costs must also be reined in to prevent Singapore from "pricing itself out of the market".

"So the bottom line is that business sentiment is slightly positive, but I wouldn't call it optimism - firms are concerned about some uncertainties that could undermine their business prospects," said Mr Seah, highlighting the low net balance of business prospects (one per cent).

Added CIMB economist Song Seng Wun: "At the company level, it's entirely possible that bosses are saying: 'These experts say we're gearing up for a better year, but I don't really see that in my business because things still look uncertain for me'. . . Companies that are more domestically oriented will find that domestic constraints will come into play more, so (it's natural that) they would give a more cautious response."

Indeed, unlike the government's business expectations surveys, which focus on the manufacturing and services sectors, the BT-UniSIM survey includes responses from companies in the construction sector (they make up 18 per cent of all respondents this time).

Given the "very negative sentiment" of construction companies at present, economists say the sector's inclusion could help to explain why after two quarters of improved performance, BT-UniSIM's latest findings show business activities have stagnated somewhat in Q1. Profits were weaker, and the contraction in sales and new orders showed little or no change.

The net balance for sales stood at -10 per cent (a decline of two percentage points), while it was -21 per cent for profits (a decrease of six percentage points) and -6 per cent for orders/new business (unchanged).

The four indicators tracked by the survey were found to be correlated with economic growth over the survey's 19-year history. The business prospects indicator, lagging by a quarter, has shown the closest correlation to GDP (gross domestic product) growth rates.

The survey now predicts 5.1-5.3 per cent growth in Q2 GDP year on year - significantly higher than DBS's and UOB's estimates of 2.5-3 per cent and 4.2 per cent, respectively.

The official flash estimate for Q1, at 5.1 per cent, is expected to be revised upwards on the back of better-than-expected manufacturing data in March. Economists now say the Ministry of Trade and Industry could revise the number up to as high as 6.1 per cent, when it releases final growth figures next week.

Of the five broad sectors poll respondents fall into, the transport & communications sector retained its top spot for a second consecutive quarter, posting the best performance across all four indicators measured.

Said UOB economist Francis Tan: "Total trade has been holding up quite well, and there's been a lot of intra-Asean flows. So it's not surprising that this segment has benefited quite a bit - demand has held up well, and optimism is strong."