Strong expansion this year leading to 'high base' effect, moderating rate next year, say economists
THE Singapore economy, which may shoot off the charts with its searing expansion this year, is creating another sort of statistical problem - this time for next year's growth.
Growth figures for this year are so scintillating that some economists have started downgrading the numbers for next year, no thanks to a 'high base' effect.
'One way to think of the economy is like a pendulum: the stronger we swing in one direction - up - this year, the greater the risk of a pullback at some stage,' said OCBC economist Selena Ling.
The economy ballooned by a formidable 18.1 per cent in the first half of this year over the same period last year, and is expected to grow by 13 to 15 per cent for the full year, the Ministry of Trade and Industry said on Wednesday.
But most economists expect this stupendous growth rate to moderate to between 4 and 5 per cent next year.
'First-half growth was stellar, and the economy cannot sustain such rapid growth,' said JP Morgan economist Matt Hildebrandt, who expects 5 per cent growth next year. 'Thus, growth is going to cool in the second half and it will likely be closer to trend in 2011 than what we have seen over the last year.'
Economists say this year's record growth is exaggerated by a low base last year due to the recession, but the opposite effect is expected to apply next year.
With such a high base this year, growth in the first half of next year could 'easily' go into negative territory, said Standard Chartered economist Alvin Liew. He expects Singapore to grow by 4 per cent for the whole of next year.
Citi economist Kit Wei Zheng on Wednesday 'fine-tuned' his forecast for next year to 4.6 per cent, from a previous projection of 5 per cent.
'The high base in the first half of 2010 will set a high hurdle for growth in the first half of 2011,' he said.
But the numbers are only part of the story. What is more important are the underlying economic trends that are expected to play out next year.
Economists such as DBS Bank's Irvin Seah have highlighted a looming slowdown in the manufacturing sector, which has been powering the rebound so far.
'Manufacturing growth on a sequential basis has cooled, and manufacturing indexes in Singapore and across key markets have peaked and are tapering off,' said Mr Seah, whose growth forecast for next year is 4.5 per cent.
Agreeing, Mr Hildebrandt said: 'Most of the demand for electronics and other manufacturing goods comes externally, so the clouded outlooks for the United States and European Union, and the more moderate growth expected in China, provide a lot of uncertainty.'
On the bright side, the domestic services industry should be supported by rising wages amid the tight labour market, said Ms Ling. 'While the external headwinds are brewing, so far, domestic fundamentals remain healthy,' she added.
The services sector has not surged as much as manufacturing, which stands it in good stead now, said Mr David Cohen of Action Economics. He is tipping 4.5 per cent growth next year.
'The swing (in services) has been somewhat less pronounced, but the sector is still showing a healthy recovery to pre- crisis highs,' he said.
'It is presumably less vulnerable to a slowdown anytime soon, supported by demand from the region, which continues to pace global growth.'
The two integrated resorts should boost tourist spending and financial and business services are expected to continue doing well next year, said economists. But slower trade flows ahead could weigh down wholesale and transportation services, said Mr Seah.
Source: Straits Times, 16 Jul 2010