Debated in Parliament on 3 Nov 2014.
Ms Foo Mee Har asked the Minister for Trade and Industry in light of weak third quarter GDP data, what are the risks to the Singapore economy and whether there are any counteracting measures planned to strengthen the economy.
The Senior Minister of State for Trade and Industry (Mr Lee Yi Shyan) (for the Minister for Trade and Industry): Madam, based on advance estimates, the Singapore economy grew by 2.4% on a year-on-year basis in the third quarter of 2014, the same pace of growth as in the previous quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, the economy expanded by 1.2%, a reversal from the 0.1% contraction in the previous quarter.
Growth in the third quarter was supported by the manufacturing sector and key services sectors. Within manufacturing, the electronics and biomedical manufacturing clusters were the main drivers of growth. Among the services sectors, the finance and insurance and business services sectors performed well on a year-on-year basis, even as growth in some labour-intensive sectors, like food and beverage services, was weighed down
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by labour constraints. On the other hand, the construction sector slowed sharply as a result of weaker private sector construction activities, following several rounds of cooling measures in the residential property market.
Overall, taking into account the third quarter performance, GDP growth in the first three quarters of 2014 is estimated to be 3.2%. For the full year, the Singapore economy remains on track to achieving the growth forecast of between 2.5% and 3.5%. This is a healthy rate of growth considering the sluggish global economic conditions and on-going domestic restructuring.
In terms of the risks to the economy, MTI's assessment is that the key risks stem from uncertainties in the global macroeconomic environment. In the US, there are uncertainties over the pace at which the Federal Reserve will exit from its accommodative monetary policy. In China, there are risks of a sharper-than-expected slowdown, given the possibility of a spike in debt defaults amidst tighter regulations of the shadow banking sector and a slowdown in real estate activities. In addition, on-going geopolitical tensions in the Middle East and Ukraine, as well as the risk of an Ebola outbreak globally, pose downside risks to the global economy. Should any of these risks materialise, the Singapore economy may grow more slowly than expected.
Nonetheless, as the global situation remains fluid, MTI will continue to monitor the situation closely and stands ready to respond in the event of any short-term shocks to the economy. At the same time, the Government will continue to press ahead with efforts to restructure the economy so as to position the economy for sustainable growth and create good jobs for Singaporeans over the long term. These include helping firms to raise productivity through the various assistance programmes, as well as helping Singaporeans to develop skills relevant to the future economy through the setting up of the SkillsFuture Council.
I thank the Senior Minister of State for his response and I appreciate the response he has given on the risks posed by the external environment. But there is a lot of discussion about our own restructuring effort that is constraining our GDP growth. The tight labour market has resulted in higher costs that have run ahead of productivity growth and we have yet to realise growth in labour productivity that is central to transforming the Singapore economy. Generally, productivity has been flat, compared to our Government's target of 2% to 3%.
I would like to ask the Senior Minister of State how we can be sure that the policies and targets that are being put in place to restructure the economy and boost productivity are, indeed, the right ones, and if they should be recalibrated after five years of restructuring experience. Do we need to have finer measurements of productivity in order to confirm that
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we are on the right trajectory even when the top-line numbers of productivity growth are not reflective? In other words, maybe we are making progress but the top-line growth rates are not showing up. The Senior Minister of State has shared the GDP growth projection for this year. Could the Senior Minister of State please comment on Singapore's longer term competitiveness and GDP growth?
Mr Lee Yi Shyan: Madam, I thank Ms Foo for her supplementary questions. Indeed, it is true that the macroeconomic conditions that we are facing now provide us with some headwinds and also some crosswinds. And depending on the sector that we are in, some of the sectors which are dependent on the US market, for example, are doing fairly well. But those that are more closely related to China and the Euro zone will find the demand lacking and, therefore, their export business may be affected.
On the domestic front, many in the services sector will continue to be faced with cost pressure, especially on manpower cost. If they are in sectors that are very competitive, for example, in the F&B and retail business, they may be faced with the challenge of not being able to pass on the cost to the consumers. Therefore, without being able to do so, they will feel their profit margins being squeezed.
Nevertheless, the Government is working with the various trade associations and industry bodies to roll out productivity improvement plans that are very customised and tailored to the needs of the sector. For instance, the construction sector is known to suffer from slow productivity growth. This is measured in terms of value-add per worker. But if you monitor the square metre constructed per man-day, they are actually making progress over the last three years. In other words, for every man-day, they are constructing more square-metre space year-on-year. However, if this increase is not reflected in the prices of their contracts, then the net effect may be a reduction in productivity.
What we are doing with the various sectors is to make sure that there are more indicators that just value-add per worker as a measure. There is a whole set of finer measures that are peculiar to the industries. For the retail sector, for instance, there is "sales per square foot of retail space". There is also turnover of inventory and so on. I would like to assure the Member that there is a whole series of measures to help us finetune the sectorial productivity plan.
Our long-term target for GDP growth is between 2% and 5%, but this is on the optimistic assumption that the external environment is favourable. It will be all right as long as we are able to achieve productivity growth between 1% and 3%. And as we all know, achieving productivity growth of 3% is a very challenging target. So, most likely, our growth target for
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this decade will be between 2% and 4%.
Assoc Prof Randolph Tan, do you want to ask a question?
Thank you, Madam. I would like to thank the Senior Minister of State for his response. I just want to pick up on a couple of points that he made and ask for more clarification.
The Senior Minister of State referred to weakness in China and the EU which we are now seeing. Those represent short-term challenges. I also agree with the Senior Minister of State that I think our productivity plan is on track but it would take some time before those show results.
What will happen if the short-term global challenges create weaknesses in the domestic economy? Do I interpret his answer correctly to say that, in the short term, our restructuring may actually place limitations on the types of responses that we are able to provide in response to global weaknesses?
Mr Lee Yi Shyan: Madam, I thank the Member for his question. Well, let me also say that I am going to give a fuller reply on productivity measures on Parliamentary Question No 29, so it is either sometime later or tomorrow that I will address that issue. In terms of productivity gain, I do not think we can have a model where we have an unrestrained number of and injection of workers into the pool to realise our growth. I do not think that will help us achieve qualitative growth – in other words, good quality growth.
What we are trying to focus on now is, given that manpower constraint is a fact and given this constraint, the question is how do we grow out of the current level of GDP? If we benchmark our industries against other best practices in other advanced economies, we know there is still room for growth: maybe it has to do with the way we embrace technology; maybe it has to do with the skill level of our workers. And also, sometimes, it is the way we structure our industry: maybe certain components are lacking, certain supply chains are missing.
Therefore, when we benchmark our industries with the rest, we find lessons to be drawn in how we can improve our industries' structure and competitiveness. We want to see the wages of our workers go up because this is good for them. But we also want to maintain or improve our competitiveness of that particular industry. The link between these two is actually innovation and productivity. There are companies that can do it and we want to encourage many more of our companies to be able to do so.
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