1 March 2004
After three years of sub-par growth, the Singapore economy appears to be finally showing signs of strength going into 2004. On 26 February, the Singapore government announced that it had raised its growth forecast for 2004 after the economy expanded at a faster-than-expected rate in the fourth quarter of 2003 on strong growth in both the manufacturing and services sectors. How long this strength can be sustained remains a question mark, though.
In the fourth quarter of 2003, gross domestic product rose at an annualised rate of 11 percent quarter-on-quarter, exceeding an earlier estimate of 7.9 percent, the Ministry of Trade and Industry (MTI) said. In the third quarter, the economy had expanded at an annualised rate of 16.1 percent quarter-on-quarter, the fastest pace since 1997.
For the full year, GDP grew 1.1 per cent year-on-year in 2003, faster than an earlier estimate of 0.8 percent growth but less than the 2.2 per cent rate in 2002.
The strength in the economy appears to have spilled over into 2004. Factory output in January 2004 rose at a seasonally-adjusted rate of 18.1 percent over December, led by strong growth in pharmaceuticals production. This was the sixth straight month of expansion for manufacturing.
These and other indicators of continuing strength in the local and global economies prompted the MTI to increase its forecast for 2004 growth to 3.5-5.5 percent from 3-5 percent. It did warn of risks -- a sharp fall in the US dollar due to the US budget and trade deficits, an overheating Chinese economy, bird flu, the re-emergence of SARS, acts of terrorism, and geopolitical uncertainties -- but did not assign very high probabilities to these risks.
Perhaps reflecting that confidence, the budget announced by the Ministry of Finance on 27 February contained few stimulatory measures, concentrating mainly on continuing the economic restructuring process that had been set in motion over the past two years.
Nevertheless, many economists remain uncertain over the sustainability of the economic strength. Even as the good news on the Singapore economy was announced, indicators from the US were showing less optimistic readings. Orders for durable goods fell 1.8 percent in January, led by a 10.4-percent plunge in orders for transport equipment. First-time claims for state unemployment insurance benefits rose to 350,000 in the week ended 21 February, up 6,000 from the prior week. And sales of new single-family homes in January slipped 1.7 percent from December to their lowest level since May last year.
In the meantime, the world got a reminder that a trade war between the European Union and the US remains a risk. After a meeting with the chairman of the US House of Representatives Ways and Means Committee on 26 February, the EU Trade Commissioner Pascal Lamy told the European American Business Council that the EU would impose trade sanctions on the US for allowing American firms to benefit from reduced export taxes by operating through subsidiaries in offshore tax havens.
And pessimists like Morgan Stanley's Stephen Roach never tire of reminding anyone who cares to listen that the global economy relies too much on the already over-leveraged US economy. With the US dollar now weakening, Roach wrote in the Global Economic Forum on 23 February that he expects "a back-up in real interest rates that would ultimately suppress domestic demand and lead to a long overdue recovery in America's national saving rate...To the extent that hiring in high-wage developed economies continues to lag, the sustainability of any impetus to private consumption can be drawn into serious question".
The MTI may be sanguine about Singapore's economic prospects for this year, but it is worth remembering what happened in 2001. Early in that year, most economists -- including those in the government -- had been similarly sanguine. Forecasts of economic growth rates largely fell between 3-5 percent for 2001 and as high as 6 percent for 2002. As it turned out, real GDP fell 1.9 percent in 2001 and rose only 2.2 percent in 2002.
With the bird flu raging in many parts of Asia this time, let's hope that precious eggs don't end up on anyone's face.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.