Not Overly Concerned for Singapore in 2014

English: An aerial view of Parliament House in Singapore. (Photo credit: Wikipedia)

With global economic growth likely to improve in 2014 compared to 2013, many Asian economies are likely to see upsides to growth in 2014. This is particularly true for open economies, such as Singapore. We think that global growth will be supported by stronger domestic demand coming from the US and Europe. Impediments to growth in the US and euro area, such as the US sequester cuts and deleveraging in Europe, have run their course. We are optimistic that stronger export demand will boost externally driven sectors in Asia, including Singapore.

In the case of Singapore, based on advance estimates, Q4 GDP grew 4.4% y/y, down slightly from 5.9% in Q3. The performance was slightly weaker than expected. On a q/q seasonally adjusted annualised rate (SAAR) basis, the economy contracted 2.7%. We are not overly concerned about the contraction, given the consecutive expansion in the past four quarters, although it does suggest that current growth momentum is moderate.

The full-year figures provide a more positive read. Singapore grew 3.7% in 2013, up from 1.3% in 2012. This performance was better than initially expected. Both manufacturing (+0.8%) and services (+5.1%) grew faster in 2013, compared with 0.1% and 1.2%, respectively, in 2012. Only construction activity decelerated - to 5.5% from 8.2% in 2012. Nonetheless, the economy remains below trend - average growth over 2000-12 was 5.6%. The underperformance in 2013 was largely due to the manufacturing sector, which grew 6.6% on average between 2000 and 2012. Services were slightly slower than trend growth of 5.9%.

Manufacturing, construction and services not only contracted on a q/q basis in Q4, but also slowed on a y/y basis compared with Q3 (note that only the overall GDP number and manufacturing, construction and consolidated services figures are provided in the advance GDP report). Manufacturing slowed to 3.5% y/y, versus 5.3% in Q3, while services also slowed to 5.5% from 6.5%. On a q/q SAAR basis, manufacturing contracted by 4%, while services contracted by 1.7%. The slowdown in construction was sharper, with a contraction of 6.9%.

Based on advance estimates, Q4 GDP grew 4.4% y/y, down slightly from 5.9% in Q3. The performance was slightly weaker than expected. On a q/q SAAR basis, the economy contracted 2.7%. We are not overly concerned about the contraction, given the consecutive expansion in the past four quarters, although it does suggest that current growth momentum is moderate.

We expect Singapore's GDP growth to accelerate to 4.4% in 2014, supported by net external demand. This is slightly higher than the government's forecast of 2-4%. Global Purchasing Manager Indexes have remained positive, hinting at stronger industrial production globally and more demand for Singapore's exports. Externally-oriented sectors are likely to benefit as the US and Europe recover and move towards trend growth. We think that GDP growth in the US will accelerate to 2.7% in 2014 from 1.9% in 2013, while growth in Europe rebounds to a positive 1.3%, from a 0.4% contraction in 2013. Stronger domestic demand from rising confidence and household incomes in the US and Europe are likely to boost demand for Singapore's exports. At the same time, China's GDP growth will likely remain resilient, supported by domestic consumption and export growth.

Overall, we think that a stronger performance in externally-oriented sectors will more than make up for the likely consolidation in domestic sectors due to the tight labour situation and a cooling property market.

While the build-up of debt in the household sector and the resulting debt service burden have increased concerns on over-leveraging, we believe that risks are only moderate for now. The Singapore government practices a very prudent fiscal policy, reflected in its AAA ratings from all three international rating agencies. In the household sector, the low average loan-to-value ratio moderates the risk of over-leverage. About one-fifth of total mortgages are under the government statutory board Housing Development Board (HDB). This reduces risk, as HDB is not as financially sensitive as banks. The government has introduced numerous measures to cool the property market. We believe these measures are prudent and will limit systemic risk in the event of an economic deterioration.

Jeff Ng is Southeast Asia economist for Standard Chartered Global Research.