How Singapore economy speeds toward recovery

Singapore is among those economies leading the way in what Christine Lagarde, managing director of the International Monetary Fund (IMF), has dubbed a “three-speed recovery”.

It divides countries into three economic growth categories: those that are doing well, those that are on the mend, and those that still have some distance to travel.

Developing and “emerging Asia” economies are on the fast track, growing at impressive rates, while other bigger economies are lagging behind. The United States is recovering at mid-speed with a moderate but steady pace. The slowest are Europe and Japan, who lack recovery momentum as they continue to face challenging obstacles to growth.

Such uneven growth makes for a fragile global economy. Lagarde wants to trade three speeds for full-speed. The IMF is advocating monetary policy reforms to kick-start those lagging behind while maintaining the growth of the lead group.

IMF data shows that Asia is set to grow at 5.7 percent in 2013 (with growth in emerging Asia reaching 7.2 percent). Though Asia’s emerging nations lead the global recovery, they could still face medium-term challenges should policy reforms prove insufficient. (The IMF catalogues “emerging Asia” as: China, Hong Kong SAR, India, Indonesia, the Republic of Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, Thailand, and Vietnam.)

Singapore needs to achieve balance
The labour market in Singapore remains robust with the unemployment rate under 2 percent for the past year. Employment stability has boosted consumer confidence and increased household disposable income.

The challenge of having a strong economy in a low-interest environment is how to manage the potential side-effect of a real estate bubble and the impact of a stronger home currency.

The government has instituted limits to curb housing prices to reduce the risk to the rest of the economy. Free trade partnership deals such as the Trans Pacific Partnership are sought to offset the effects of the rise of the Singapore dollar by increasing demand through lowering tariffs.

The challenge going forward for the city-state will be how to leverage the fast speed of recovery while protecting the economy from the shocks of troubled large economies.

Singapore should examine the impact of structural deficits in the economy and the need for fiscal consolidation to help manage strong capital inflows.

To avoid middle-income stagnation Singapore may need to leverage tactics such as economic rebalancing, greater infrastructure investment, and reforms in goods and labor markets.

United States growth: slow and steady
The moderate speed group is best exemplified by the United States. Signs point to a country on the mend after the financial crisis that erupted in 2008. Housing and employment are two of the most improved economic indicators. The pace has been slow, but sustained, fueling a rise global optimism.

However, long-standing fiscal challenges threaten to derail the recovery if not dealt with in the short term.

ECB faces austerity fallout
Europe and Japan are part of the most concerning group. The Euro zone has made strides this year, but the end of the crisis is not in sight despite the optimistic statements from EU politicians.

Unemployment continues to rise and austerity has been a questionable approach in reaching a solution to the current crisis. The ECB has been in the front line of bailing out countries in need with active mechanisms, but the lag in deep structural changes has made austerity a huge political issue.

The IMF had to go from a two-speed model to three due to a continued stagnation of the European and Japanese economy while the US and others experience growth.

Going forward it is a possibility that this framework could become more fragmented as the US faces the risk of being outpaced by members of its speed group. Asian nations could also improve the speed of recovery and break away further from the rest of the world.

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