Singapore economy on path to recovery, steady growth in 2018: MAS

SINGAPORE'S economic recovery is gathering pace, with growth rates accelerating over two straight quarters thanks largely to a sustained increase in global electronics demand, the Monetary Authority of Singapore (MAS) said.

While pockets of weakness remain in some sectors, growth is broadening beyond trade-related industries, with economic expansion expected to remain steady in the coming year, the central bank noted in its latest macroeconomic review out on Friday.

Official forecasts tip economic growth of 2 to 3 per cent this year. The final figure is expected to come in at the upper half of this range, before moderating slightly in 2018, the MAS said.

The central bank struck a noticeably more optimistic note in its latest macroeconomic review, noting that steady growth in the global economy is likely to be sustained in the near term, amid more favourable business sentiment and tightening labour markets in developed economies.

In Asia, the trade upswing since late 2016 has led to a pick-up in manufacturing activity and a rise in incomes, which should filter through to stronger domestic spending.

In tandem with this rosier environment, Singapore's economy has expanded by an average of 4.4 per cent quarter-on-quarter in the second and third quarters - a turnaround from the contraction recorded in the first quarter of the year.

The upswing was led mainly by trade-related sectors, which were in turn boosted by the continued strength in the global electronics cycle.

At the same time, stronger growth has also been accompanied by a broadening of the recovery across more industries. While growth in the earlier quarters was confined largely to electronics-related segments, most of the other industries have started to see signs of a pickup, the MAS noted.

Some of the strength in the domestic IT-related segments should carry over into 2018, but the growth momentum is expected to see some pullback in the quarters ahead, the central bank said.

Meanwhile, industry segments such as financial services and retail are expected to benefit from the improvement in the overall business climate, as well as underlying strength in regional trade and growth.

This means growth should become less patchy across sectors in the coming months, the MAS added.

Some segments are still struggling, however, including marine and offshoring engineering as well as construction.

The central bank said the marine and offshore engineering sector, which has been hit hard by low oil prices, is expected to exert less of a drag on growth in 2018, compared with 2017.

Likewise, in the construction sector, the low volume of contracts awarded in 2015, as well as the postponement of large-scale public sector projects such as the 21.5 km North-South Corridor from mid-2017 to 2018, suggest that the sector could remain weak for the rest of 2017.

However, this could turn around in 2018 - albeit modestly - thanks to the stream of progress payments from earlier rail-related contracts awarded in 2016 and the additional $1.4 billion worth of public sector contracts brought forward over the next two years to support the industry.

The improving business environment seems to have strengthened the corporate sector, the central bank said.

While structural trends, such as the rise of US shale production, will limit growth in the oil industry, supply-demand imbalances are slowly being resolved in favour of a more neutral outlook for rig manufacturers.

Net firm formation reached 6,700 in the first half of this year, significantly higher than the half-yearly average of 2,000 in 2016, with broad-based increases seen in all segments except retail.

While the number of retail firms contracted on a net basis by around 20, this was considerably less than the average 1,410 declines registered in the first and second halves of 2016.

In addition, the 7,640 workers retrenched in the first half of this year was also substantially lower than the 9,510 recorded in the same period a year earlier.

Despite the more sanguine outlook, the central bank kept its exchange rate policy unchanged at its latest policy meeting this month. This came as the Singapore economy grew by 4.6 per cent in the third quarter compared with the same period a year earlier, according to data from the Ministry of Trade and Industry.

This was higher than the 2.9 per cent growth in the preceding three months and the fastest pace in more than three years.

The MAS uses the exchange rate as its main monetary policy tool to strike a balance between inflation from overseas and economic growth. The rate is allowed to float within a policy band that can be adjusted when monetary policy is reviewed.

A stronger currency - which corresponds to tighter monetary policy - counters inflation by making imports cheaper in Singdollar terms, while a weaker Singdollar helps to lift growth by making exports cheaper abroad.

The exchange rate is managed against a basket of currencies of Singapore's major trading partners.

The Singdollar policy band is now on a path of zero appreciation against the currencies of key trading partners - a "neutral" policy stance put in place in April last year amid slow growth and low inflation.