Laggard trade, low interest rates and "painful" structural adjustment.
In its 2013 outlook for Singapore, UBS Investment Research identified these three as the main risks to country growth in 2013. Exports and trade could remain subdued and lower than projected. Low interest rates might also crank up spending and inflation, pushing it up higher than historical normals. And its ongoing labour market restructuring could bring more painful effects than forecasted.
Here's the complete 2013 outlook from UBS Investment Research:
Singapore’s real GDP growth has underperformed its peers in ASEAN since the rebound from the global financial crisis petered out in early 2011. Sensitive to swings in global activity, Singapore growth has been constrained by global headwinds to growth. The good news is that lead indicators of global trade growth are now improving. The bad news is that they have not improved very much and European and US fiscal issues continue to cloud the horizon.
Moreover, because the downturn in exports and manufacturing did not result in significantly depressed domestic spending in Singapore, there is less to recover from than was case in previous notable down-cycles. In the period Q1 2011 to Q3 2012, seasonally adjusted real GDP has expanded just 0.1%. However, final domestic demand, the combination of domestic investment and consumption, has risen 6.4% in real terms. There is also seemingly little spare capacity to expand into; the unemployment rate in Q3 2012 was just 1.9%. We expect Singapore real GDP growth to recover, but only to 3.5% in 2013 and 4.5% in 2014 from 2% or less in 2012.
Low interest rates and easily available credit, combined with the confidence arising from a tight labour market, have helped boost households’ willingness to spend, prompting higher than usual inflation in Singapore. We expect inflation to slow in 2013 and 2014 to 3.5% and 2.8% respectively. However, these are rates of inflation that are still high relative to history.
Government policy is likely to keep Singapore's labour market capacity constrained (by reducing the availability and increasing the cost of foreign workers) in a bid to force increases in low income worker wages and productivity. Employment growth is expected to slow from 3.8% yoy in Q3 2012 to around 2% in the medium term.
MAS currency policy is to be calibrated to allow some leeway for the government's labour market policy to work, but we expect the bias to be towards tight rather than loose monetary policy. We forecast USDSGD 1.15 by end 2013 and 1.12 by end 2014. With US interest rates projected to remain low over that time frame, Singapore short term interest rates should likewise remain close to zero.
Risks: global cycle, low interest rates, structural adjustment. There is the risk that exports and related trade pick up less than we project. At the same time Singapore is experiencing extraordinary low interest rates; the danger is that these are inducing unwise spending or investment decisions. In addition to the risks posed by the global cycle there is the possibility that the government’s goal of structural adjustment in the labour market (higher income, less employment growth, higher productivity) may induce a more painful than hoped bout of restructuring in the economy.
We draw comfort from the fact that Singapore has successfully undertaken adjustments in the past.
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