SINGAPORE, August 04, 2017 – Singapore’s economic growth is expected to strengthen to around 2.5 percent in 2017, while inflation is expected to be low and stable and the financial system resilient, according to the preliminary assessment by the ASEAN+3 Macroeconomic Research Office (AMRO) after its Annual Consultation Visit to the country from July 6 to 28, 2017.
Led by Dr. Sumio Ishikawa, AMRO Lead Economist, the mission focused on discussions around economic outlook, risks and vulnerabilities, structural challenges and the appropriateness of policy measures, including fiscal policy, monetary policy, and structural reforms. AMRO Chief Economist Dr Hoe Ee Khor was part of the mission.
“In recent quarters, Singapore’s economy has benefitted from stronger external demand and international trade,” said Dr Ishikawa. “At the same time, the authorities have undertaken active policy measures to address structural challenges, especially in the labor markets. Core inflation rose from a very low level in 2016, and is likely to stabilize at the current level in the coming quarters.”
The current monetary policy stance is appropriate. In April 2016, The Monetary Authority of Singapore eased the monetary policy by flattening the Singapore dollar nominal effective exchange rate (NEER) policy band. The policy parameters have been kept unchanged since then. At the same time, the real effective exchange rate (REER) has been trending down due to lower inflation. The lower REER implies that business cost has fallen compared to trading partners and an improvement in competitiveness. The current monetary policy stance is appropriate, as the inflation outlook is stable and low, output gap is still negative, and labor markets are still facing both cyclical and structural challenges.
Fiscal spending is budgeted to increase in FY2017 to foster an innovative and connected economy with inclusive growth. Expenditure needs are expected to rise rapidly in the coming years, particularly in healthcare and infrastructure. Budget FY2017 builds on efforts of economic restructuring proposed by the Committee on the Future Economy, such as SMEs Go Digital Programme and the Tech Access Initiative, among many other initiatives. Budget FY2017 also pays attention to near-term headwinds and provides help for those affected by restructuring. As the economic recovery is still nascent and uneven, fiscal support will help to ensure that the recovery is sustained.
The macroprudential measures rolled out since 2009 have been effective in curbing speculation in the property market and excessive leverage among households. Meanwhile, the recalibration of some macroprudential measures in March 2017 has boosted market sentiments. In this regard, AMRO concurs with the authorities’ view that existing macroprudential measures should be maintained in light of a still-low interest rate environment and elevated household leverage.
Over the long term, considering the changing demographics, rapid shifts in technology and growing skills mismatches, the authorities have initiated multi-year restructuring efforts to steer the country towards a labor-lean, high productivity, and innovation-based economy. This includes embracing new technologies and facilitating the creation of new jobs in the sharing economy. While there are also job “missed matches” where job seekers do not know where the openings are, and growing issues of skills mismatches in the process of economic transformation, supportive policies have been adopted to facilitate the labor market adjustment process such as the SkillsFuture initiatives, the Career Advisor Programme, the Professional Conversion Programmes and Career fairs. The tripartite collaboration among the unions, employers, and the government will continue to be key in the successful implementation of these initiatives.
With strong support from the Singapore authorities and other stakeholders, the visit has deepened AMRO’s understanding of the current macroeconomic and financial situation, as well as critical issues related to economic restructuring in Singapore.