On 14 July, Singapore released its second quarter (April-June) gross domestic product (GDP) growth numbers. These are preliminary. They are not based on June data yet. Further, Singapore is a small city-state and hence, its GDP growth will tend to fluctuate around a lot more than others. Even then, the contraction was an eye-opener. GDP fell 0.8% sequentially and rose 2.1% year-on-year (y-o-y). Consensus expectation in the market was for a GDP growth of 3.1% y-o-y.
This surprise contraction is attributed to the departure of one semiconductor manufacturing unit from Singapore. Singapore's Economic and Development Board called this a one-off event. We are not so sure. It could be the beginning of a trend. In fact, one more relocation out of Singapore in the third quarter is being talked about. To be sure, we do not expect a rush to the exit by Singapore manufacturing companies. But, it is inevitable as Singapore remains a high-cost economy. It needs a good dose of deflation-wage and cost compression-over a sustained period, to restore competitiveness. That is socially painful and politically unacceptable to the government. The government has postponed some public sector projects to avoid importing more foreign workers. The government wants to boost high value-added manufacturing and productivity in the economy and yet, it wants to curb immigration. It wants to keep a lid on inflation-given already high costs-and at the same time, it wants to boost wages of domestic workers.
These are fundamentally incompatible objectives and something has to give in the end. One thing that Singapore appears to have achieved successfully in the last one year or more is a soft-landing in the real estate market. Rents for apartments have dropped swiftly and considerably. This has also dampened speculation in the real estate market. According to data released by the Urban Redevelopment Authority in Singapore on 15 July, housing transactions fell 68% in June from May. Number of units sold in June dropped to 482 from 1,488 units in May. These are primary market transactions. July too looks likely to be a weak month for home sales. This is a good thing. Dampening speculation in asset markets is a good thing as an economy driven by asset prices is prone to frequent booms and busts, to inequality and to higher costs, in general. The other good news for Singapore trying to rein in costs is that certificate of entitlement prices for automobiles have been declining steadily in recent auctions.
However, these efforts are compensated, unfortunately, by two factors: globally accommodative monetary policy and abundant liquidity and Singapore's high and rising reliance on the financial sector to drive economic activity in the island. If manufacturing units leave Singapore due to high costs, then naturally the share of services and that of the financial sector in the economy would rise.
An economy dominated by the services sector is prone to high costs and low productivity. Singapore's economic restructuring will be as protracted as it is inevitable and it is complicated by the government's political (re-election) priorities. So, expect more volatility in Singapore economic growth and high cost stickiness. Not an exciting prospect.
Even though the semiconductor-manufacturing unit had relocated in April and analysts had enough time to reduce growth estimates, they still predicted a 3.1% expansion rate. They were caught by surprise. In other words, growth is slowing in other aspects too. That is why most forecasters are now revising downward their growth forecasts for Singapore for 2014. They are leaving their more optimistic forecasts for 2015 intact, for now. However, over time, that too will be revised downwards. Optimism on global growth is misplaced and even if not, local headwinds in Singapore are stronger.
The important question is one that pertains to the Singapore dollar. It must be tempting for the government to push the currency towards the lower end of its band. But, we do not know if it would make any meaningful economic difference. Most major economies are working either openly or furtively to debase their currencies. Further, it is quite possible that the Monetary Authority of Singapore is aware of the inflationary potential of the government's policy of curbing labour immigration (or, allowing it only under higher wages) and pushing domestic wages higher. Hence, it may prefer to lean against the wind. They have done a good job of reining in speculation in the real estate market with decisive measures. Therefore, Singapore dollar will remain stable to strong, by default.
Overall, the inescapable conclusion is that Singapore's halcyon growth days are behind it. That is no adverse reflection on Singapore for it is inevitable for individuals, institutions and sovereigns to grow, to peak and then to decline. What is sad is that many refuse to acknowledge the inescapability of this cycle and try to resist it, making the ultimate denouement more complicated and painful.
V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com. To read V. Anantha Nageswaran's previous columns, go to http://ift.tt/1mw4YMB
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