Economists hike S'pore trend growth to near 8%

Business Times - 25 Jul 2007

Main drivers include foreign labour growth, rise of Chinese and Indian economies
By ANNA TEO

(SINGAPORE) The Singapore economy can grow at a near-8 per cent pace for the next several years, economists believe.

Driven by an influx of foreigners, the economy's underlying growth potential has risen above the long-assumed 4-6 per cent range, they say.

Already, in the last three years, the economy has grown an average 7.8 per cent a year -
without stoking inflation, which has averaged just over one per cent a year over the period.

In a recent research report, HSBC economist Robert Prior-Wandesforde said: 'Singapore enjoys by far the best growth-inflation trade-off of any developed country in the world and it is hard to see what will stop this impressive performance from continuing over the foreseeable future. Indeed, it may get even better still.'

He reckons that the economy probably bottomed out in the first quarter of 2007 when it grew 6.4 per cent. 'Either overall policy conditions have been unusually supportive of activity and/or the trend rate of growth is considerably higher than the 4-5 per cent number suggested by the government and others.'

Singapore's medium-term growth potential has long been estimated at, initially 3-5 per cent, later raised to 4-6 per cent, with contributions from labour, capital and productivity.

But recent developments - reinforced by early Q2 growth estimates - suggest a higher trend growth rate. Despite a slump in export and manufacturing growth, the economy has remained buoyant, growing 8.2 per cent in Q2.

Mr Prior-Wandesforde thinks Singapore's new potential trend growth 'may be something in the order of 6.5 per cent', but other economists figure higher.

Says Nanyang Technological University economist Choy Keen Meng: 'My gut feel is that

Singapore should be able to grow at a range of 5-7 per cent, rather than 3-5 per cent, in the next five to eight years. Why? Because, barring unforeseen but especially political events that might throw spanners into the works, the rise of China and India will easily add a percentage point or two to GDP growth in Singapore, simply by servicing the needs of these economies.'

Most of the expansion is likely to come from foreign labour growth, he adds. 'The ability to attract foreign investments and an open-door policy on foreign talent will be critical.'

Agreeing, Citigroup economist Chua Hak Bin believes that Singapore's trend growth has probably risen to about 6-8 per cent over the next five years.

'I attribute the large part of the increase in trend growth to the labour component. For a small open economy like Singapore, foreign labour growth is an important driver. A more liberal immigration policy has lifted the potential labour growth component; it's no longer constrained by declining fertility rates and an ageing local population.

'Allowing gaming and lower tax rates have also opened up investment opportunities and raised returns on capital. This has increased investment and capital growth.'

He estimates that labour growth will contribute about 2.5-3.5 percentage points to GDP growth, capital growth about 2-3 points, and total factor productivity (TFP), about 0.5-1.5 points.
TFP can be seen as the qualitative part of economic growth that is not due to sheer increases in labour or capital. It reflects the efficiency with which people and capital are combined to produce output, and is conventionally measured as the residual in economic growth after the contributions of labour and capital are accounted for.

More bullish, PK Basu, Daiwa Institute of Research chief economist for Asia ex-Japan, thinks Singapore's potential growth is currently 7-8 per cent.

'Annual employment growth has averaged 2.8 per cent over the past 10 years, so it is reasonable to assume that the sustainable pace of labour force growth is actually closer to 3 per cent than the long-held figure of 1-2 per cent,' he says. And annual productivity growth across the economy has averaged 4 per cent over the past five years. 'I think this is the new sustainable pace of productivity growth.'

As for TFP, he believes that Singapore's TFP growth is improving as the economy 'now requires substantially less capital (gross domestic investment rates of 22-25 per cent now) to generate the 7.8 per cent annual growth in real GDP we've witnessed over the last three years, and which I expect to be sustained into this year and next'.

And given that external balances around the region are now more stable, it is reasonable to assume that Asia will be less subject to systemic crises in the next 10 years, he adds. Singapore will also be less vulnerable to the global IT cycle now that pharmaceuticals' contribution to manufacturing value-added looks set to exceed electronics' by next year.

'So yes, real GDP growth of near-8 per cent is actually quite sustainable for Singapore now - as evident in the fact that inflation hasn't risen at all during the past three years, even with growth being sustained at that pace,' MrBasu says.

HSBC's Mr Wandesforde says that the higher trend growth probably reflects underlying improvements in the services sector, as well as a rise in the investment share in GDP.

'It seems likely that the corporate sector has now repaired its balance sheet after the Asian crisis and is prepared to start spending in a meaningful and sustained fashion. This is particularly true of the construction sector.'