Flailing export dampens GDP growth outlook

Singapore's growth for 2016 will be at the lower end of 1-2%.

The relatively steady, but mediocre growth in external demand, is likely to continue over the near term, the Monetary Authority of Singapore (MAS) said in their biannual macroeconomic review.

"In particular, uneven global demand has been accompanied by a downshift in the relationship between trade and income, reflecting compositional changes in final expenditure of industrialised countries and ongoing restructuring of global value chains. The resulting weakness in global trade has clearly impacted Singapore, given its high trade dependency," the central bank said.

MAS explained that this has been further compounded by the exposure of the economy to particular underperforming sectors, such as semiconductors and transport services. The confluence of these factors and the associated product price declines have led to heightened pressure on firms’ profit margins. The accompanying consolidation within pockets of trade-related industries will further weigh on the economy in the quarters ahead, and consequently, growth will largely be underpinned by activity in the modern services and domestic-oriented sectors. On balance, GDP growth is projected to come in at the lower end of the 1–2% forecast range in 2016, and only slightly higher in 2017.

"While the risk of a major global downturn has subsided somewhat, external demand will continue to be uneven across a number of Singapore’s key export markets. In addition, growth in some trading partners, including the US, will be largely supported by domestic consumption, which tends to be less import-intensive than investment. Concomitantly, structural headwinds are expected to persist as the ongoing reconfiguration of global value chains and the investment down-cycle continue to restrain global trade flows," the central bank noted.

MAS furthered, "As one of the most trade-dependent economies in the world, Singapore is inevitably impacted by subdued external demand and global trade. Growth in the trade-related industries is likely to be constrained, even though there are signs of a bottoming-out in particular segments."

It noted that instead, support for growth will come largely from the modern services and domestic-oriented industries. In financial services, the general dissipation of weakness in intermediation activity should help shore up the sector, which had slipped in the past two quarters. Sustained government spending on ICT initiatives and a stream of public infrastructure projects alongside robust demand for essential services, such as healthcare, should also provide some support to overall domestic growth.