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Singapore shows its strengths

Singapore's breathtaking economic growth, an annualized 24% compared with the previous three months, is unlikely to continue at the same pace as key trading partners such as the United States and the European Union struggle to maintain recovery momentum, according to the government.

Prime Minister Lee Hsein Loong this week said the city-state's economic expansion, like that of the rest of export-dependent Asia, would be slowed by new austerity policies in Europe. Even so, the government kept its annual growth forecast for 2010 at 13% to 15%. The economy grew 18.8% in the three months through June compared with the same quarter a year earlier.

"It is possible that we could have two quarters of negative sequential growth, which would qualify as a technical recession," Ravi Menon, permanent secretary of the Ministry of Trade and Industry, told reporters on Tuesday, The Star website reported.

The EU, the US and Japan take up about 33% of Singapore's non-oil exports, but this is down from 55% about 15 years ago as less-developed trading partners in Asia take a bigger share. China now takes up about 10%, and looks set to become the number one destination for the city-state's exports, overtaking the EU's 14.5%. (Figures are from 2009.) The US share stands at 11%.

Manufacturing, up 44.5% in the second quarter compared with a year earlier, led the drive in the latest growth surge, but this sector "probably peaked in the first half of 2010", according to Standard Chartered economist Alvin Liew, quoted by Bloomberg News. "The big unknown is still pharmaceuticals, which can swing either way, and can swing violently."

Production in the sector surged 70% in the first six months this year, a spike in output unlikely to be repeated, according to Leong Wai Ho, senior regional economist at Barclays Capital. "This really reflects the switch over in the product mix in pharmaceuticals from relatively more patented drugs to generic drugs," Today reported, citing Leong. The Trade Ministry noted that "anticipated plant maintenance shutdowns" would also drag down overall growth.

Other second-quarter growth came from services, up 11.2%, construction up 11.5% and financial services, up 10.2%.

Singapore's economy has benefited from a US$13.7 billion stimulus package announced in early 2009 as the global financial crisis deepened and trade, linchpin of the economy, imploded. Since then, the government has sought to secure more growth from domestic spending and reduce dependence on exports, even though these have given Singapore the world's third-best growth rate since the downturn.

Certainly, increased consumer confidence, helped by more people being hired in each of the past four quarters and with inflation still only at around 3%, has boosted local spending. Home prices reflect the positive outlook - between March and the end of June they jumped 5.2%.

Singapore's decision, taken before the global financial crisis hit in late 2007, to attract more tourists by permitting casinos as part of proposed "integrated resorts" now appears to be paying off. Visitor arrivals increased in June for the fourth straight month, helped by the opening of the city's first of two new casinos in February.

The for-now strong economic growth may be a factor in the attention being given to an article by Nobel economist and New York Times columnist Paul Krugman, on the "myth of Asia's miracle", which contains contrary remarks about Singapore. The article has very recently gained a great deal of currency, being cited in several Internet blogs, but almost no one who discusses it mentions the source. It was published in the US Council on Foreign Relations journal Foreign Affairs in 1994: that is, sixteen years ago.

Krugman asserted that "all of Singapore's [annualized 8.5% economic] growth" from 1966 to 1990 "can be explained by increases in measured inputs. There is no sign at all of increased efficiency. … Singapore's growth," he concluded, "has been based largely on one-time changes in behavior [doubling of the employment rate, increase in education, etc] that cannot be repeated" on a regular basis into the future.

Krugman also called the share of investment in the economy at 40% "amazingly high by any standard; a share of 70 percent would be ridiculous". Consequently, "Singapore is unlikely to achieve future growth rates comparable to those of the past.

Foreign direct investment (FDI) in fact accounted for 70-90% of total investment in the city-state from 2006 through 2009. Singapore's economic growth is thus highly sensitive to variations in FDI, yet the economy increased about 5% in 2009 despite the global financial crisis.

In the event, subsequent to Krugman's forecast, Singapore's growth rate averaged 6.4% from 1996 to 2000; then, under the influence of a world slowdown, the economy barely grew for the next three years. It then posted increases of 8.3% in 2004, 6.4% in 2005, 7.9% in 2006 and the same in 2007, before once again declining to no net gain under the influence of the global financial crisis in 2008.

So despite this year's turbo-charged performance, Krugman was not off-base. Why his 1994 article has suddenly obtained such out-of-context currency is a bit of a mystery, unless it is to give an air of authority to those who wish to pooh-pooh a "decoupling" of Asian equity markets from those in the West.

The Straits Times Index has been in a trading range for nine months between 2,780 and 3,020; or for nearly 13 months if one counts the lower bound as 2,520, the main plateau it found in July 2009, after recovering from the March 2009 low of 1,457. It has just failed to break out to the upside through that trading range, and short-term technical indicators are mildly unfavorable.

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