It’s a gloomy New Year for Singapore’s underperforming economy: Morgan Stanley

Cyclical and structural forces continue to weigh on the outlook.

Analysts at Morgan Stanley are not very optimistic about Singapore’s economy in the coming year, as they expect GDP growth to trend down from the 8.8% CAGR seen in the 2004-07 period, with GDP growth expected to come in at 3.2%/3.4% for 2015/2016 (vs. 2.8% for 2014).

Furthermore, other idiosyncratic factors such as the relocation of manufacturing capacity out of Singapore have led industrial production and non-oil domestic exports to remain on weak footing, with the latter underperforming global and regional AXJ exports.

Meanwhile, the leverage cycle continues to unwind, posing further headwinds to the economy. Credit growth is decelerating and the property market and construction are seeing the collateral impact from that. Indeed, URA 4Q14 private residential property price index shows that prices have fallen 4.0% for full year 2014 and are down 4.9% from the 3Q13 peak.

Here’s more from Morgan Stanley:

Additionally, the aging population and policy measures to wean the economy from dependence on foreign labour given the infrastructure/political/social constraints continue to exert pressure on near-term and medium-term growth. Also, such labour supply adjustment is likely to put a floor to wage cost/core inflation.

Amid these cyclical and structural growth pressures, macro-rebalancing to tap higher growth segments and export destinations and measures to improve productivity would be the only sustainable panacea to lift potential growth whilst at the same time, manage inflation, in our view.

However, deteriorating demographics and labour supply adjustments point to a lower structural potential growth trend until productivity can catch up to close the gap.