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Singapore is set to see modest growth in 2014 as a tight labour market constrains some industries amidst improving global demand. Growth exceeded initial estimates last quarter with GDP increasing by 4.9% on the back of a surge in manufacturing output seen in March this year.
The city state is 5 years into a 10-year economic transition strategy aimed at reducing the country’s dependence on cheap overseas workers and attracting new industries such as research and development.
Singapore’s trade-dependent economy is vulnerable to fluctuations in global demand although economic recoveries in the US and Europe are expected to support growth in the Southeast Asian nation, even with China’s expansion cooling.
Economist Daniel Wilson of Australia & New Zealand Banking Group based in Singapore commented: "The tighter labour market should place a cap on the manufacturing sector. At the margin, the gain from an externally led services rebound is still less than the gain that would accrue from an unconstrained manufacturing sector."
Foreign Exchange Policy
As the Singapore dollar fell 0.1% against the US dollar this morning, the central bank has already stated that it intends to maintain a modest and gradual appreciation of the currency. The country’s currency is used by the bank to manage price pressure.
Contrary to estimates, GDP expansion has also been experienced elsewhere in the region with Indonesia’s economy growing 5.21% and Malaysia expanding by 6.2%.
Singapore’s Prime Minister, Lee Hsien Loong has implemented a policy tightening the hiring of foreigners in recent years in response to voter discontent over an influx of foreign workers increasing competition for jobs, property and education and general infrastructure strain.
Tight Labour Markets to Restrict Growth
"Continuing tightness in the labour markets is expected to weigh on growth in some labour-intensive sectors," the trade ministry commented. "While a gradual improvement in the global economy will help manufacturing and wholesale trade support growth, an unexpected increase in the pace of the Federal Reserve’s exit from stimulus or unintended effects from China’s efforts to rein in credit growth, pose risks."
The economy expanded 4.9% in the first quarter from a year earlier after growing a revised 4.9% in the previous three months according to the trade ministry as the government reiterated its forecast for the economy to expand 2% to 4% this year and for the non-oil domestic exports to increase between 1% and 3%.
Manufacturing grew 11.9% in the first quarter compared with an April estimate of 4.5% expansion. Services rose by 0.4% in the same period with construction increasing by 0.6%.
Michael Wan, economist at Credit Suisse Group (Singapore) said: "It’s the manufacturing sector that is the key driver behind the revision. The second half of this year should be the period where growth picks up much more strongly, not just for Singapore but also across the Asia region, on recoveries in the US and Europe."
GDP is the broadest measure of economic activity in a country. Singapore releases advance GDP estimates shortly after the end of each quarter and follows up with a detailed survey of the economy about a month after the initial report.
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