An International Monetary Fund (IMF) team led by Alex Mourmouras visited Singapore during April 28-May 10 to hold discussions in the context of the country’s 2016 Article IV Consultation. At the end of the visit, Mr. Mourmouras issued the following statement:
“Singapore’s economic growth has slowed down markedly in recent years. Real GDP grew by 2 percent in 2015, down from 3.3 percent in 2014). The slowdown represents both cyclical and structural factors. At home, growth is constrained by an aging labor force, tighter limits on foreign workers, and the transition costs of the shift to an innovation-based growth model. On the external front, the outlook for global growth and trade remains subdued. The decline in global oil prices, however, helped the oil trade deficit narrow by 3.7 percentage points of GDP in 2015 over 2014, boosting the current account (CA) surplus by 2.3 percent of GDP. “Headline inflation is in negative territory since November 2014, reflecting the impact from lower energy and other commodity prices, lower premiums for car ownership certificates, and a softening in property prices. Core inflation remained below 1 percent y/y as of 2016Q1.
“The labor market is softening. Real wages continued to rise in 2015 and the overall resident unemployment rate remained broadly unchanged at 2.8 percent. But net employment generation slowed down rapidly in 2015. Following a sharp increase in 2014, there were negligible net gains for Singapore residents. Incidents of redundancy have been rising in recent quarters.
“Looking ahead, GDP growth is projected to slow further to 1.8 percent in 2016 as the full impact of the slowdown in global trade and capital outflows experienced in 2015 are felt and private investment is held back by the uncertainties on the horizon. In surveys, companies report little appetite to hire and bank credit remains subdued. On the positive side, lower energy prices should support private consumption, government spending has been rising, and external demand should gradually recover. Growth is projected to improve to about 2.5 percent in 2017. Headline and core inflation are projected to remain subdued in 2016, before rising modestly in 2017 as energy and commodity prices are expected to gradually recover.
“Risks to the outlook are tilted to the downside. A sharper-than-expected slowdown in global growth is the most important short-term external risk. This could manifest itself through a significant downshift in China and other large emerging economies as well as weak growth in key advanced economies. Tighter or more volatile global financial conditions could lead to sharp asset price declines, a rise in credit spreads and a surge in the U.S. dollar. These external risks could be magnified by, and interact with, domestic vulnerabilities from elevated levels of leverage.
“The mission welcomes the authorities’ structural reform agenda, which focuses on supporting innovation-led growth. Productivity enhancement will be vital for Singapore’s growth over the medium term. Slowing population growth and tighter immigration policies imply a slower expansion in its labor force. Against this backdrop, incentives for higher private sector spending on R&D and improving skill matches in the labor market, particularly for the higher value-added jobs, will be important in enhancing productivity and ensuring sustainable and inclusive growth.
“The April 14 adjustment by the Monetary Authority of Singapore (MAS) of the slope of its exchange rate band represents the latest of a series of moves to ease monetary policy that commenced in January 2015. The mission views these moves as appropriate: growth is below two percent, inflationary pressures are not present, labor market pressures are receding, and commodity prices, including for oil, are stabilizing globally. Although inflation is on track to reach a stable medium-term level of under two percent by the end of 2017 in the baseline, the MAS should remain vigilant to signs of deflation and adjust its policy settings further if needed.
“The increased government spending in the 2016 budget is timely, as near-term risks to growth have risen. The government has also taken a more targeted approach to encouraging firms to boost productivity through tax rebates, limited deferrals of hikes in foreign worker levies, and financial support for working capital and employment. The government has the flexibility to react if downside risks eventuate. If risks materialize, the authorities are prepared to implement fiscal stimulus through targeted measures, for example providing more income transfers to poor families and seniors and accelerating infrastructure spending, which would reinforce existing measures to reduce income inequality and help cope with the aging of Singapore’s population.
“The mission would like to acknowledge the leading role Singapore plays in international economic and financial cooperation through its active participation in global and regional organizations, as well as its support for capacity building in the region. The mission expresses its gratitude to the authorities for their openness, cooperation, and hospitality.”
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