While Singapore’s underlying growth potential has risen in recent years, the economy will be fully stretched at the seams

While Singapore’s underlying growth potential has risen in recent years, the economy will be fully stretched at the seams if it continues to grow between 7 and 8 per cent, as it has on average between 2004 and 2007, economists say. They now see a need to bring GDP growth down to around 6 per cent.

Against a backdrop of slower global economic growth next year, economists say Singapore’s GDP expansion has to be moderated before overheating pressures - now nascent - build up further. Apart from moves underway to ease the pace - such as the delay of some S$2 billion worth of public building projects - it also means ‘not taking active measures to improve growth if they are going to cause overheating’, says Chetan Ahya, chief economist for Southeast Asia and India at Morgan Stanley Asia.

Concerns about overheating risks - in the form of both consumer and asset price inflation - dominated discussions at a recent economic roundtable organised by the Institute of Policy Studies and BT. Speaking about the Singapore property market at the forum, Mr Ahya and his colleague Deyi Tan said they see in the ongoing real estate boom speculative excesses in the private residential segment, but genuine demand - and possibly further upside - in the commercial office market. Beyond the property market, resources are also being stretched. Does the growth trend need to take a breather, they ask.

‘My personal view is that we probably need to slow the overall demand in the system right now… demand is so strong… The supply response function in all pockets of the economy does not catch up to the shift in demand,’ Mr Ahya said.

He pointed out that the average annual growth between 2001 and 2003 was only 1.6 per cent - well below its underlying potential. There was therefore quite some excess capacity. In the four years since, the economy has ramped up sharply, growing almost 7.8 per cent on average, assuming GDP growth this year amounts to 7.7 per cent, which is Morgan Stanley’s forecast. The official forecast is ‘between 7 and 8 per cent’.

Growth of near-8 per cent for four years is ‘clearly above the underlying potential’, Mr Ahya said, even if the trend growth has risen in recent years. The government now estimates the economy’s medium-term trend growth at 4-6 per cent, while most private sector economists put it higher at 5-7 per cent, some going as high as 8 per cent.

In the first few years from 2004, the economy could sustain the robust expansion without signs of strain because there was all that excess capacity from the recent lean years. But now ‘there is stretch in the system’, Mr Ahya says.

‘We now have to go back to 6 per cent.’

He believes that Singapore can easily grow 6-7 per cent a year in the next two years if there were no overheating pressures in the last two years. ‘Everything that can be done to ensure that we moderate growth down should be done,’ he told BT. ‘The Singapore government is actively boosting the economy by measures such as the integrated resorts but it (the economy) does not have the capacity to absorb the necessary labour or provide the infrastructure that allows for that growth without causing overheating.’

At the roundtable, Khor Hoe Ee, assistant managing director (economics) of the Monetary Authority of Singapore, said: ‘I would say there has been a tightening of financial conditions this year. We are growing at a pace greater than what the resources are capable of accommodating. That is something that monetary policy can’t deal with very easily, whether through interest rates or exchange rates.

‘We are going to have to manage some of these pressures over the next two years until the supply comes onstream. In the meantime, the appreciation of the exchange rate does help to lower tradable prices and help to keep prices down.’

While there has been concern about the jump in inflation in recent months, Dr Khor pointed out that, apart from the effect of July’s 2-point hike in the Goods and Services Tax, the increase in the underlying inflation here is still within the norm.



Source: Business Times 19 Nov 07