Singapore’s Economic Policy Posers

Source : The Business Times, 29 November 2007

OCCASIONALLY, it’s apparent that the economic indicators don’t quite square with the reality on the ground. The Singapore economy’s robust GDP figures do reflect the buoyant conditions at hand, but it’s also one instance when the numbers don’t quite tell the whole story.

With GDP growth expected at between 7.5 and 8 per cent for 2007 - well surpassing early official estimates of 4-6 per cent at the start of the year - it should, by all accounts, go down as another banner year, one more notch in Singapore’s growth record. And indeed, the strong economic performance will translate into a fatter bonus for civil servants at year-end, and presumably for many private sector employees as well, if their companies had a great ride of the economic boom. It’s the fourth year in a row, after all, that the economy has grown above its trend potential.

In any case, sub-8 per cent growth is smashing good growth for an economy that’s no fledgling. But inevitably perhaps, the remarkably charmed co-existence of high growth and low inflation that Singapore has enjoyed in recent years is finally fizzling out. While almost a pedestrian rate by world standards, Singapore’s 3.6 per cent October inflation rate, a 16-year high, amounts to something like a return of inflation with a vengeance, driven by a mix of domestic and imported factors.

The recent spike in inflation has led to calls for measures to - almost ironically, one would think - curtail demand and growth in an over-stretched economy. Much as the government has maintained that the economy is not overheating, it has moved quickly enough to snuff out bubbling price pressures - it scrapped a key deferred payments scheme for property purchases, it postponed several major construction projects, it allowed the Singapore dollar to appreciate by a bit more than usual in a bid to contain imported inflation, and it is now further relaxing the foreign worker quotas.

The question is: Will a further strengthening of the Singapore dollar next April (as is widely expected) suffice to deal with the mounting inflationary pressures, or are additional cooling measures needed? Notably, for all the buzz in the economy, business sentiment has weakened of late, with companies less upbeat about the next six months, and even emerging signs of a slowdown in activity, a BT-UniSIM survey found. Similar official surveys also found cautious optimism among manufacturers, and some dampened spirits in the service sectors.

Among workers, amid a tight labour market and big pay jumps, the problem of a skills mismatch and structural unemployment among older, low-educated Singaporeans hasn’t entirely disappeared overnight. So, are cooling measures in order? A US recession, or even a sharp slowdown, if it happens, will probably take care of any runaway growth in Singapore.

Then again, minus other measures, how far can exporters and the economy stomach a strengthening Singapore dollar, which could erode the economy’s competitive edge? There are quite some policy posers in these seeming rollicking good times.