Singapore heads for slowest growth since 2009 after dismal Q2

Singapore

As the government pared its economic growth forecast for 2015 on Tuesday after dismal second-quarter numbers, a key question being asked is whether the clampdown on foreign labour in Singapore could be putting too much of a squeeze on the wobbly local economy.

The benchmark Straits Times Index also tumbled 1.4 per cent or 43.60 points to 3,153.06 - its lowest level since last October - after the Ministry of Trade and Industry shaved its official gross domestic product (GDP) growth estimate for the full year from 2-4 per cent to just 2-2.5 per cent - even worse than the 2-3 per cent range most economists had been expecting.

The upper limit of just 2.5 per cent growth means that the economy is headed for its slowest pace of expansion ever since its 0.6 per cent contraction in 2009 in the depths of the global financial crisis.

The narrower growth forecast range came after a lacklustre 1.8 per cent expansion in Q2 GDP from the previous year, which was largely due to a contraction in the manufacturing sector. Though this number was slightly better than the flash estimate of 1.7 per cent growth and the revised market consensus of 1.6 per cent, it still marked a significant slowdown from the 2.8 per cent year-on-year expansion the economy notched up in the first quarter of this year.

GDP also shrank 4 per cent in Q2 from the preceding quarter, essentially erasing its 4.1 per cent quarter-on-quarter gain in Q1 this year. The slide raises the spectre of a potential technical recession, economists said. Still, unless there is a significant change in economic conditions, the Monetary Authority of Singapore is expected to keep its monetary policy stance unchanged at its October review as it focuses on inflationary pressures, which are still a concern because of higher costs resulting from tight labour policies.

To some economists, the poor showing in Q2 provides yet another sign that the restrictions on foreign labour inflow are too strict, piling pressure on firms already facing an environment of global and regional economic uncertainty.

"The foreign labour measures are overly tight and risk tipping the economy into recession. Manufacturing is already in recession, with the contraction worsening in the second quarter," said Bank of America Merrill Lynch economist Chua Hak Bin, adding that labour productivity in the Republic "shows few signs of improving in the second quarter, remaining negative despite the government's productivity campaigns".

China's move on Tuesday to devalue the yuan could put more pressure on Singapore's exports and already-faltering manufacturing sector while weak growth in Southeast Asia will likely drag down Singapore's prospects, he added.

DBS economist Irvin Seah said that though the uncertain external environment was partly responsible for the disappointing GDP growth in Q2, overly tight foreign worker curbs also played a role by limiting companies' ability to grow. "There are better approaches to restructuring the economy rather than tightening the policies on foreign labour ... What should have been the emphasis over the past few years of restructuring should instead be growing our local enterprises and promoting top-line growth."

Others told The Business Times that the existing foreign labour curbs were a necessary medicine. "The foreign worker tightening is a necessary adjustment for the labour force to make a jump in its skills mix and for it to become more efficient," said Barclays economist Leong Wai Ho. "Unless there is a systemic shock - as opposed to the current slowdown - we should not detract from this needed adjustment. It will pay us dividends in terms of our ability to compete globally in the longer term."

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