Singapore still faces structural headwinds to growth

The country has seen its growth slow in the recent years, reflecting the lack of trade and economic growth around the world.

Singapore is a rich country and a beacon of the modern world. It GDP per inhabitant is close to 53 kUSD and it should reach 58.5 kUSD in 2020. The country is ranked as one of the easiest to do business with and it is well equiped in high quality infrastructures and educated workforce. The country is also recognized as a bellwether of global trade.

But the recent years have proved to be a challenge. The dynamics of international trade has been lacklustre in Asia. This was due to slowing EM demand and weak global capital spending according to Nomura’s economists.

Source: IMF

Source: IMF, Trade volume of goods and services for the world (April 2016, IMF Database)

The country has also suffered from the fall of energy prices, since it is an important refiner and trade warehouse, with 40% of service valued-added related to trade activity.

For the last six years, the country has engaged into heavy restructuring of its economy, but with little results so far and as Nomura’s economists put it in a recent report : « the going could get tougher as the economy has been hit simultaneously by several negative shocks. »

Singapore’s government has recognized the issue and tries to help its citizen get a more diversified skill set to seize new job opportunities as the economy is restructuring.

Source: IMF

Source: IMF

Yet there are structural headwinds to Asian growth. The slowdown of the Chinese economy is the most obvious, but other factors are at play: high levels of debt across Asia, misallocation of capital due to cheap credit (property market speculation), demographic headwinds, slow productivity and lack of structural reforms in a number of countries.

Singapore has been in the eye of the storm for some time now. And could remain there, along other countries in the region.

Is the dynamic changing ?

8 years after the financial crisis, the global economy is still moving slowly. This situation is not expected to change anytime soon. The main reason is that there is too much leverage in the world.

According to Morgan Stanley, the world debt-to-GDP ratio is now at 238%.

« Mixed progress on the deleveraging cycle in DM, continued deterioration of productivity of incremental credit in China and Korea and several other EMs still in an adjustment phase have meant that, at an aggregate level, we should still expect a tepid recovery in private demand and hence subdued global growth », the bank’s economists wrote in a recent report.

As an important financial center in Asia, Singapore is also exposed to the volatility in financial markets and the impact of tougher regulation on the financial sector around the world.

(c) Copyright Weeko, 2016

(c) Copyright Weeko, 2016

The good news is that the cost of debt is declining, thanks to central banks intervention all around the world.

But many economists worry that if there was another recession in a large economy, this could lead to a dreadful situation, since central banks have reached the limits of their monetary toolkits.

This means many economies, including Singapore’s, will have to rely more heavily on structural reforms and adopt more supportive policy-mix until the global economy gets a stronger footing.

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