the trouble with the economy

The latest median forecast for the economic growth this year is 1.8% (

We should be expecting stagnation in the economy in the next 2 years and possibly a recession should there be any shake-ups externally.

What is the problem?

  1. Demand for Singapore’s exports is falling

Worldwide, demand is falling. The shipping sector is doing badly. Hanjin, one of the largest shipping line in the world, has filed for bankruptcy. Oil and gas is also faring poorly as demonstrated by Swiber’s recent brush with bankruptcy.

In the previous global financial crisis, the western advanced economies were the ones in trouble, but Singapore could still rely on China and regional economies for some support.

The situation now is different. The western advanced economies are in a limbo, while China is simultaneously slowing down, dragging down regional economies that export oil and commodities.

  1. Labour costs are rising

For the longest time, Singapore has been at full employment. Our unemployment rate has been hovering at record low levels of 1.9% to 2.1% (even at the peak of the recession, it was a healthy 3.4%).

We had previously solved our supply bottlenecks with a quick fix, i.e. by importing cheap foreign labour. This is no longer possible and politically palatable since 2011. Thus, we have had to ramp up efforts on pushing productivity since then. While the target was 2%-3% productivity growth for the last 5 years, the actual realized productivity growth was bordering on 1%.

It is hard to increase productivity. Firstly, it takes time. Secondly, while firms are still struggling to push for higher productivity, they will have to bear with the higher labour costs. Lastly, the smaller firms who are unable to do so will exit – which may not be a bad thing (natural selection – not productive = not competitive = out) but we must be prepared for more layoffs.

While we switch to productivity-driven growth, the world will not wait for us. In the immediate term, we can expect to become less competitive in terms of pricing and see some fall in demand.

What will the government likely do?

  1. A recession budget for 2017

We are likely to see a recession budget for 2017, likely what we will see in in Minister’s Heng upcoming budget. A recession budget would be something similar to the Resilience Package of 2009. There’s also a chance that the Government might decide to draw down on the reserves should the economic climate worsen drastically and tax collections fall significantly.

Here are some of the measures that the government could potentially adopt in the 2017 Budget

  1. Increase corporate income tax rebates (note that the government is already doing so presently – 50% for YA2016 and YA2017)
  2. Introduce personal income tax rebate
  • Reduce CPF Contribution rates for employers
  1. One time increase in social transfers to lower income groups similar to GST Offset Credits
  2. Some form of wage subsidy scheme to retain workers similar to the Jobs Credit Scheme
  3. SME Cash Grant

The above are simply ‘recycling’ of old ideas and tricks in the “government handbook”

  1. Increasing government expenditure

Government should realise that external demand will be weak for some time, and within this prolonged period of weak global demand, increased government expenditure can provide some support for the economy.

Thus, the government will likely bring forward some infrastructural construction projects with long term benefits (schools, hospitals, highways, public transport).

However – this will weaken the fiscal position in view that we already have a primary budget deficit now.

What should the government do?

  1. Recommend a wage freeze via the NWC for at least 2 years to keep wages competitive
    • This is something that we used to do, but may no longer be politically palatable to push through
  2. Further provide support for productivity growth in sectors which have significantly lower productivity compared to Western counterparts
    • I would recommend a tweak in schemes such as the PIC, whereby currently the 40% cash grant / 400% tax deduction is a standard one-size fit all solution. What could be done would be to target specific industries with significantly lower productivity compared to western counterparts such as construction sector by giving them say “PIC ++”, 80% cash grant instead. Vary the % depending on sector – higher amounts for sector struggling to increase productivity.



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