SG: slowest growth in six years

9 July 2015

Economics

SG: slowest growth in six years

Uncertainties in the global economy and domestic restructuring continue to weigh on growth
The labour crunch has further compounded the problem, limiting
companies ability to grow
Loan growth has dipped into the red and the negative output gap has
continued to widen. Both will put downward pressure on growth and
inflation
We now expect 2.4% GDP growth in 2015, the slowest in six years

Singapore will celebrate its 50th year of independence next month. Despite the
upbeat mood, the weak global economy and drag from domestic restructuring
continue to weigh on growth. Advance GDP estimates for the second quarter
due next week will likely show a contraction of 2.0% QoQ, saar (+2.1% YoY).
We have revised down our 2015 growth forecast to 2.4% from 3.2%. This will
be the slowest growth since the US / global financial crisis of 2008/09.

External slump
Manufacturing remains the weakest link. Output probably fell by 5.3% YoY in
2Q15, twice as much as the 2.7% contraction in Q1. A confluence of factors are
weighing on the sector (Chart 1).

Output probably fell in

2Q15

External headwinds remain strong. Exports to the top 3 markets the US, Eurozone and China may have bottomed but a pick-up remain elusive (Chart
2). US recovery remains tepid. The Grexit malaise infecting the Eurozone could
proved protracted. And Chinas economic slowdown, coupled with the recent
Chart 1: NODX and manufacturing in doldrums
% YoY
35

NODX
IPI

Three years of doldrums

25
15
5
-5
-15
-25
Latest: May15
-35
Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Irvin Seah (65) 6878-6727 irvinseah@dbs.com

1

SG: slowest growth in six years

9 July 2015

Chart 2: %-pt contribution to export growth

%-pt contribution
US

10

EU

China

8
6
4
2
0
-2
-4
-6
-8
Jan-13

Latest: May15
Jul-13

Jan-14

Jul-14

Jan-15

equity market rout and sluggish real estate sector, could have a lasting impact
on Singapore given that it is Singapores largest export market.
Domestically, the labour crunch and rise in production costs owing to restructuring have compounded growth concerns. Absent a stronger recovery in the
US, the outlook for Singapore manufacturing is more half empty than half full.

Domestic labour crunch

The domestic labour crunch is a key impediment to growth, particularly for the
service sector. Companies are struggling with labour shortages due to years
of tight foreign labour policies. Although the foreign manpower curbs were
meant to lift labour productivity, distortions in the labor market have become
apparent.
The labour crunch has constrained growth

Specifically, while unemployment is already below the natural rate of 2.0%

and job vacancies have been rising, Singapores employment shrank for the
first time in nearly six years in 1Q15 (Chart 3). Overall employment contracted
by 6,100 persons in the first quarter, after rising by 40,700 in 4Q14. The decline
was driven mainly by a sharp moderation in service employment and a continued decline in manufacturing employment.

Chart 3: Sharp drop in employment change in 1Q15

'000
80

Global financial crisis

60

Total employment change

40

Services

20
Construction
0
Manufacturing
-20
-40
Mar-06

Mar-08

Mar-10

Mar-12

Mar-14

SG: slowest growth in six years

9 July 2015

Chart 4: Loan growth dipped into contraction

% YoY
45

Overall loan growth

40

Consumer loan growth

Housing loan growth

35

Biz loan growth

30
25
20
15
10
5

Latest: May15

0
-5
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

The manpower curbs have impeded companies ability to grow in the nearterm. Tightening in the foreign worker Dependency Ratio Ceilings (DRCs) in
past years has restricted employers from hiring more low-wage foreign workers unless they hire more locals. With the local labour supply pool nearing its
peak, companies are unable to hire more even if they are willing to do so. This
is a self-imposed supply-side constraint that has put a heavy lid on growth.

Growth outlook downgraded

Loan growth has turned
negative

There are other signs of deceleration in growth. Loan growth slipped into the
red for the first time since the US / global financial crisis (Chart 4). Overall loan
growth registered -0.1% YoY in May, the first decline since Oct10. Business loan
growth has recorded two consecutive months of decline and consumer sentiment is cooling as well.
Beyond the weak global outlook, pressure from domestic restructuring, property market cooling measures and risk of higher interest rates are weighing on
business confidence and consumer sentiment. These present further downside
risks to growth.
The negative output gap continues to widen (Chart 5). Slack in the economy
has already pushed core inflation to near zero at 0.1% YoY, from 0.4% in
Chart 5: Output gap turning more negative
% YoY
5

Output gap

% YoY
3.5

Core inflation (RHS)

3
2.5

1
1.5

-1
-2

Latest: 1Q15

-3

0.5
0

1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15

SG: slowest growth in six years

9 July 2015

Chart 6: Singapore GDP growth, 2010-2015

% YoY
18
16

15.2

14

We now expect 2.4%

growth in 2015 and 2.9% in
2016

12
10
8

6.2

6
3.4

4.4
2.9

2.4

2
0
2010

2011

2012

2013

2014

2015f

April and 1.0% in March. The decline in core inflation goes hand-in-hand with
the widening (negative) output gap, both of which underscore the deceleration in growth.
The outlook for the year remains cloudy. Interest rate expectations will swing
and currencies will be volatile given the risks in the global economy and the divergence in monetary policy directions. Domestic restructuring and the resulting labour shortage will weigh on growth. Beyond what we now expect will be
the slowest growth in 6 years (2.4% in 2015), we have also cut our forecast for
2016 growth to 2.9%, from 3.5% previously.

Notes:
[1] See also SG: watch core inflation dated 16 Jun15.

SG: slowest growth in six years

9 July 2015

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