Something is lagging in Singapore growth

Eddie Lee, The Straits Times, Asia News Network, Singapore

It was the kind of growth Singapore has been waiting for: After two years of languishing in the low single digits, growth finally hit 7.3 percent in the first quarter of this year. From laggard of the region, Singapore became the turnaround story of Asia, with a rate higher than every country in Asia except India and China.

Does this mean Singapore is on the growth path and will beat all other countries in the region?

Well, not quite. First, the high growth rate for the first half of this year was partly boosted by the previous year's low base. Economists expect the full-year rate to slide back to around 6 perhaps 7 percent at best.

Still, this would place Singapore nearer the top end of Asia's growth league. One main driver behind the growth is investment, which has led the strong performance in exports. But where Singapore still lags is in the filter-down effects to the rest of the economy. The result is that wage growth is expected to be modest this year.

Singapore has retained an edge in attracting new investments even as some manufacturing operations have relocated to lower- cost sites overseas. Despite the Asian financial crisis and the bursting of the Internet bubble, investments committed in the manufacturing sector have been maintained at around US$9 billion a year. This amount barely slipped last year, to $7.5 billion. Still, the ability to attract investment meant that, after a slump in 2001, exports quickly recovered in 2002 and rose by 12 percent last year.

Singapore's strength lies in its ability to foster investment growth, particularly for capital-intensive projects like the chemicals industry. The official policy of subsidizing and coordinating investments facilitated the establishment of a cluster of industry players and service providers that allowed for economies of scale production. Individual investors might not have found it profitable to invest otherwise.

Singapore's exports of chemicals have thus soared. Last year, chemical exports accounted for almost a fifth of total domestic exports, more than double its share just three years earlier.

You can bet there's a good chance Singapore will be in the running to attract investment from wherever the next new wave may be. The country still possesses considerable resources and determination to suggest that.

It is the filter-down effects that have become less predictable. The questions to be answered are how many high- paying jobs the new industries will create, and how long the downward wage pressure from escalating competition in the region will last.

From this perspective, this year's outlook isn't as buoyant as the headline growth in the country's gross domestic product (GDP) suggests. According to a poll of employers by Hong Kong-based human resources services HR Business Solutions reported in The Straits Times last month, while salaries in Singapore are set to increase by an average of 3 percent this year, this is only marginally higher than last year.

And even as more companies are set to increase hiring, ongoing economic restructuring in Singapore means job losses will persist. About 9 percent of companies here, the highest percentage in Asia, indicated that they want to downsize their work force.

Where the real surprise to regional growth could come from is Indonesia. Falling interest rates and rising consumer confidence have led Indonesia's economic recovery. While Singapore's GDP growth is expected to exceed Indonesia's 5 percent, the filter- down effects of an economic recovery are more evident in Indonesia.

According to HR Business Solutions, Indonesian companies expect to increase wages by 12 percent this year. Even adjusting for the country's higher inflation rate, wages are still expected to rise 5.5 percent compared with Singapore's increase of just over 1 percent.

There are other telltale signs of the Indonesian economy's growing strength. Building cranes are swinging again in Jakarta. Retail shopping malls made a comeback last year, with occupancy and rentals now back to around 80 percent of pre-1998 crisis levels. And of the 2,700 condominium units offered on a pre-sale basis this year, nearly all have been sold.

In contrast, while analysts in Singapore expect new private home sales to increase to around 5,500 to 6,500 units this year from 5,156 in the previous year, the amount sold will be still some 37 percent less than in 2002.

Since what is important for consumer confidence isn't so much the absolute standard of living but how that is changing, the slower filter-down effects mean Singapore's economic strength still won't beat many countries in Asia.

So how will Singapore rank in the region this year? Better than you thought, but perhaps not quite what you think.