The Singapore Economy Is On A Roll

Source : The Business Times, October 11, 2007

But it may be unwise to 'invest' all of one's gains playing on the new roulette wheels that are on the way

ANOTHER quarter, another pleasant growth surprise in Singapore. The total output (GDP) of the economy grew by 9.4 per cent in the year to the third quarter, exceeding most forecasts as well as the growth rate of other top performers in the region such as Vietnam and, in all likelihood, India.

New growth drivers: Positive sentiment in Singapore has been whipped up by the prospect of the integrated resorts (such as Las Vegas Sands's Marina Bay project above), the Formula One Grand Prix and the Singapore Flyer

Singapore, as a developed country, is once again showing the kind of expansion normally reserved for developing countries. And to make it even more impressive, this is happening at a time when sizeable concerns surround the US economy, the global electronics cycle has yet to surface from doldrums and GST has recently been raised to 7 per cent.

Singapore's extraordinary resilience reflects strength in industries such as financial services, which is benefiting from still abundant global liquidity; construction, where order books are full with property and infrastructure-related projects; offshore engineering, partly reflecting the high oil price; and not least, the government-favoured biotech sector.

I forecast that such buoyancy will continue, with average GDP growth of 8.5 per cent this year and 7.3 per cent next year. Both projections are above the top end of the government's forecast ranges.

Such strong economic growth is, however, beginning to create problems in the form of rapidly rising costs and prices, while asset markets are beginning to look a little frothy as well.

The second quarter of 2007, for example, saw wage growth hit a seven-year high of 8.5 per cent, no doubt spurred by employment gains of 8.5 per cent over the last year.

The private residential property price index jumped a provisional 27 per cent in the 12 months to the third quarter, while residential rents leapt 30 per cent, and office rents, a staggering 47 per cent.

The Straits Times equity market index is also up more than 50 per cent over the last year and credit growth is running at a double digit rate as well.

So does this all indicate that Singapore is entering an unsustainable bubble similar to that of the mid-1990s and, if so, how is the government likely to react?

Judging by the frequency with which the state of the property market is brought up both by taxi drivers and at parties, as well as the number of property supplements that are springing forth, I would hazard a guess that a real estate bubble may well be in the making.

Positive sentiment in the country has also been whipped up by the prospect of the integrated resorts, the Formula One Grand Prix and the Singapore Flyer.

Nevertheless, even if a bubble is building, I suspect there is plenty of scope for it to expand further. After all, the level of the private residential property price index is still more than 10 per cent lower than it was in 1996, according to Urban Redevelopment Authority data.

Adjusting for the growth in incomes over the period, property is not much more than half as expensive as it was 11 years ago.

The dramatic bursting of the mid-1990s bubble, which saw property prices almost halve in the space of a couple of years, may make the government more cautious in stepping in so aggressively this time, although it may also make it keener to act sooner rather than later.

One small hint of the central bank's inflationary anxieties was seen yesterday with the surprise decision by the MAS to steepen the pace at which the Singapore dollar is targeted to appreciate, albeit marginally.

The government has also increased land sales and raised development charges, targeting the en bloc sales that were, until recently, all the rage. I would not be surprised to see further cooling measures filtering through over the coming months.

The good times are certainly rolling for many and I think they will roll for many more as the benefits of strong growth and the associated property and income gains continue to spread through the economy.

A word of warning though. It may be unwise to 'invest' all of one's gains playing on the new roulette wheels that are coming our way. You may need to save some for the occasional rainy day.

The writer is senior Asian economist at HSBC