Economy hit hard by global headwinds
In 2023, Singapore’s growth was significantly hampered by slowing global trade, low manufacturing activity, tighter financial conditions, and persistently elevated inflation. High dependence on the export economy will generate faster growth in the next year but will be below trend. This largely reflects expected sluggish global demand in 2024, with a recession risk for the US (Singapore’s fourth-largest goods export market, accounting for nearly 9% of Singapore’s total merchandise exports). The country is also likely to face weak demand from its main trade partner, China (12.4% of goods exports in 2022), which has been struggling to recover since its zero-Covid policy ended in late 2022. This would restrict manufacturing activity, which contracted continuously from October 2022 to August 2023. Having said this, global demand for electronics, one of the country’s biggest manufacturing segments, is likely to recover. As in 2023, sluggish international trade will weigh on services exports through receipts from transportation services (35% of services exports in 2022). Conversely, services exports related to the tourism sector (11% of GDP before the pandemic) will continue to recover in 2024. International arrivals represented 70% of 2019 levels over January-August 2023. Financial and insurance (13.7% of GDP) will continue to be affected by tight monetary policy in the US, and possible global high-risk aversion on back of economic and geopolitical uncertainty. Following the introduction of cooling measures, residential property and rental prices showed signs of stabilising in 2023. While construction activity should expand, boosted by both the private and the public sector, the sector will face additional challenges including increasing dormitory costs and stricter work permit rules for migrant workers.
Inflation is expected to remain much higher than in pre-pandemic years and will be fuelled in part by elevated and probably volatile energy and food prices, and commodities for which the city-state largely relies on imports, as well as a GST rate hike. Nevertheless, inflation will continue to slow, providing some relief to households. In this context, private consumption (30% of GDP) should remain robust. Transfers of low and middle-income households, as well as a tight labour market – the unemployment rate was 1.9% in Q2 2023, one of the lowest on record – would also help support consumption. The Monetary Authority of Singapore, which tightened rates from October 2021 to April 2022, is likely to ease its rate policy amid slow growth and moderating inflation.
Sound financial situation
The current account surplus will narrow in 2024, albeit to a substantial level. A wider primary income deficit, which can be explained by a reduction in receipts of Singaporean residents’ investment abroad – notably portfolio investments, financial derivatives, and other investments – amid weaker global economic activity, will be the reason behind this. Meanwhile, the trade balance, which mostly drives the current surplus, could slightly increase as the gradual recovery of exports will be only partially offset by capital-related imports. Rising foreign tourism inflows will keep driving the expansion of the service balance surplus. On back of this durably large current surplus, foreign reserves will remain at an adequate level (8.6 months of imports in August 2023).
After a large fiscal deficit in 2020 due to Covid-related expenditure, the government posted small surpluses amid the ensuring economic recovery and the gradual lifting of Covid-related spending. Overall expenditure, however, remained hefty due to higher development expenditure – notably transport infrastructure, healthcare, and environment – and the introduction of support measures to help households and business cope with high inflation. In 2024, the government is likely to continue allocating wide resources to tackle long-term economic challenges (ageing of the population, vulnerability to global warming, etc.) and maintain the purchasing power of the most vulnerable households, while aiming to contain public spending. On the revenue side, the additional one-percentage point increase in the Goods and Services Tax (from 8% to 9%) scheduled for 1 January 2024 and faster economic growth is expected to boost tax receipts.
While public debt is high on paper, it is used to create a domestic safe asset market and is mainly composed of long-term bonds and securities. In addition, large reserves built up in the past from previous fiscal surpluses (200-300% of GDP) can be used to fund the rare budget deficits. The banking sector appears vulnerable to real estate, with 21.5% of outstanding domestic loans dedicated to building and construction. However, the sector’s NPL ratio stood at 1.5% in the second quarter of 2023, which is slightly lower than for the totality of commercial bank loans (1.7%), while capital and liquidity buffers remain above regulatory requirements.
Stability and continuity ahead of the 2025 general elections
The People’s Action Party (PAP), which has ruled the country since it gained independence in 1965, remains a dominant ruling party in Singapore’s politics. A disruption to the succession plan after the announcement in 2021 by Deputy Prime Minister Heng Swee Keat’s to step down as leader of the fourth-generation PAP team. Prime Minister (PM) Lee Hsien Loong had planned in 2020 to step aside two years later, but the pandemic delayed his departure. PM Lee named Finance Minister Lawrence Wong as the new leader in 2021, before promoting him Deputy PM. In 2023, the PAP was dogged by political scandals, which are rare in the city-state. Despite the scandals, Lawrence Wong is expected to become PM during the next general elections that are due to be held by 2025. Although the Prime Minister (PM) wields the greatest power in politics, the overwhelming victory by the PAP’s candidate during the presidential election in September 2023 reflects the party’s popularity. Tharman Shanmugaratnam, former Deputy PM, scored 70.4% of the votes.