Singapore's economy faces up to a difficult year

Take the American economy first. Several forecasters placed economic growth in the final quarter of last year at around 2.5% to 3%, which is well above the economy’s potential growth rate of around 1.8% to 2%. In the latest purchasing manager survey, the American services sector, which accounts for close to 80% of the total economy, was gaining strength at the end of 2024. With a strong pipeline of new orders, the sector’s strength is set to continue into 2025. Moreover, American companies continue to step up capital spending — core capital goods orders rose in November and have generally surprised to the upside last year. Thus, while the economy probably will not sustain such high growth rates of close to 3%, there is nothing in the data to suggest a sharp slowdown.

This economy has defied expectations that the sharp increase in borrowing costs in recent years would produce a recession. There are good reasons for this. The American economy is exceptionally flexible and has shown an extraordinary capacity for innovation — the impressive technological advances in artificial intelligence (AI) are just one example of this innovation capacity, the progress in biomedical sciences is another. Thus, the better-than-expected performance of the economy in 2024 is not just a one-off but reflects enduring strengths in the country.

China is more complex. At one level, surveys show the economy picking up some momentum in December, particularly in the non-manufacturing segments of the economy. Construction activities perked up noticeably at the end of the year, evidence that the government’s stimulus is beginning to work. But the broader services segments also gained momentum, giving hope that consumer demand was beginning to improve.

However, persistent deflation, falling bond yields and a weakening currency seem to suggest that policymakers are still not doing enough. This is why the authorities have signalled much stronger support for the economy — through fiscal, monetary and administrative means. There is now a greater sense of policy urgency to turn the economy around and that should percolate through to confidence. The government is, for example, preparing to increase subsidies to consumers to encourage them to upgrade their smartphones, tablets and smartwatches. The central bank is shifting to a “moderately loose monetary policy” while the overall fiscal deficit will be allowed to increase to 4% of GDP. All this should help steady the Chinese economy.

See also: Slow payments deteriorate slightly in 4Q2024: SCCB

What about a trade war?
There is huge uncertainty about the trade policies of the next US administration but there are two areas of possible comfort. One is the indication from within President Trump’s inner circle that his advisors are trying to find ways to implement the tariffs that Trump favours strongly in a selective and targeted manner so as to minimise the negative fallout, such as inflation. That will still mean a notable increase in protectionism but at least tariffs will fall far short of the across-the-board ones that Trump used to talk about. Trump is very sensitive to how the financial markets will react to his policies and he knows that an aggressive trade policy could lead to market corrections that will not show him in good light.

The other point to note is that we need to look at the totality of Trump’s policy moves, not just the tariff actions, to assess the overall effect on the global economy. Trump has vowed a major burst of deregulation which should help boost the economy as firms take advantage of a more supportive business environment to invest and expand. In addition, it is virtually certain that the fiscal stance will become more expansionary: our expectation is that Congress will favour tax cuts but will not move radically on spending cuts. While the new administration will almost certainly carry out deportations of illegal immigrants, it is unlikely to be on such a large scale as to cause economic dislocations.

Overall, while the global economy is likely to take a hit from a bout of US protectionism and tit-for-tat retaliation from trading partners, other factors could offset the worst effects and keep global demand on track.

See also: OCBC and Oxford Economics lower 2025 GDP forecast on high base; some analysts expect monetary easing to happen this year

Singapore’s economy showed strong momentum at the end of 2024
Singapore’s economy grew by a robust 4.3% y-o-y in the final quarter of the year after expanding 5.4% in the previous quarter. For all of 2024, the economy recorded 4% growth, accelerating from the 1.1% growth recorded in 2023. Looking forward, some of the developments in 2024 will help the economy in the new year.

The first is the outlook for consumer spending. Real income growth for those earning the median wages and for lower-wage earners appears to have recovered to levels that prevailed in the pre-pandemic period. Most workers enjoyed wage increases that outpaced inflation, which means that their real purchasing power improved, likely spurring consumer spending and fuelling economic activity. Indeed, on average, Singapore’s private consumption grew by 6.5% in the first three quarters of 2024, up from a 4.1% average in the previous period.

What is less encouraging is that consumer confidence is on edge. A Straits Times survey conducted in late 2024 revealed apprehension among a majority of Singaporeans about their economic prospects, with many worried about rising prices and a heavier burden of household expenses. In addition to that, Singaporeans seem to be increasingly directing their spending abroad. One example of this is the growing popularity of overseas travel. For example, travel agencies have reported a 20% increase in bookings for Chinese New Year travel in late January compared to the previous year, reflecting a preference to spend on experiences outside Singapore.

On the other hand, there are encouraging signs of strong investment. The Economic Development Board (EDB) secured US$5.4 billion ($6.2 billion) worth of fixed asset investment (FAI) commitments in the first half of last year.  These commitments keep the EDB on track to achieve its medium- to long-term goal of US$8 billion to US$10 billion in annual FAI — a figure that will support Singapore’s economy through the uncertainties. As these investments are realised, factories will be constructed and production will eventually grow, lending support to economic growth.

How helpful will increased integration with Malaysia be?
We believe that Singapore’s integration with Malaysia, particularly with neighbouring Johor, holds immense potential for strengthening growth opportunities. Now that there is a formal agreement to establish the SEZ between Singapore and Johor, new opportunities will be unlocked as the SEZ will ease the flow of people and goods across the border. The formal agreement will also give comfort to investors that pro-integration policies will not be changed willy-nilly as a result of a change of government. The SEZ agreement will also result in greater cooperation between the two governments to jointly promote investments, develop skills and address issues such as sustainability.

We see positive implications from the SEZ for a number of reasons.

First, there is extraordinary complementariness between the two regions. Singapore is land-scarce, which means that there is only so much one can do in 730 sq km of space. Johor, in contrast, has land and labour, which Singapore can tap into. Singapore is also carbon-constrained, something that will matter more as efforts are stepped up to achieve net-zero carbon emissions.

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Second, it will be a win-win proposition because Johor’s ability to leverage Singapore’s advanced infrastructure, logistics networks and financial clout will give it an edge in attracting investments. This was already evident in the impressive surge in data centre investments in Johor, which were aided by the proximity to Singapore. As Johor’s economy accelerates, there will be a range of new opportunities for Singapore to provide services to Johor.

Third, as a global city, Singapore needs a hinterland with which it is seamlessly integrated to compete against other global cities. One example is how all global cities have multiple airports, which Singapore simply does not have the space for.

Fourth, Singapore’s costs have risen inexorably, both the costs of living for the average person as well as the cost of doing business. The SEZ will allow some of Singapore’s excess demand for land and labour to be vented in Johor, relieving cost pressures locally.

Consequently, interest in the SEZ among businesses has grown, with many companies visiting Johor to study the opportunities there. Companies in the food manufacturing and logistics industries cited cost-saving and access to new markets through the Zone as key factors to look forward to, while mid-sized manufacturing and logistics firms are reportedly looking to utilise land in Johor.

Our take on the economic outlook is as follows:

• The economy should grow by around 1.1% in 2025
While this seems a bit of a letdown after the exciting 4% growth in 2024, it is quite good considering the risks in the global environment. External demand will come under strain as a result of global trade tensions. However, a global tech recovery and the SEZ will provide partial offsetting sources of investment demand as some of the supporting infrastructure, such as the ongoing works for the cross-border rail project, continue to make progress.

• Cost of living pressures will probably ease further, with inflation settling down to about 2.0%
The moderation in inflation will be driven by several factors, including the fading impact of the GST hike implemented last year, lower electricity tariffs starting in 2025 and declining commodity prices. There could be some inflationary risks if geopolitical conflicts cause disruptions in global supply chains and if rising protectionism puts upward pressure on prices. However, overall, we think inflation will still be lower than last year.

• Cyclical policy calibrations are likely to shift more in favour of supporting economic growth
Prime Minister Lawrence Wong has already indicated that the forthcoming budget to be announced in February will provide more support for Singaporeans. The government’s fiscal position gives it much room for manoeuvre, with our estimate of the augmented budget balance revealing a substantial surplus, highlighting the government’s capacity to introduce further measures to support Singaporeans.
The Monetary Authority of Singapore is likely to adopt a cautious “wait and see” approach as it assesses the downside risks in the global economy. Still, with inflation returning to target levels, the possibility for some easing of monetary policy will increase.

• Long-term policy will focus on the Forward Singapore agenda
Policies to address cost-of-living concerns and enhance social policies for vulnerable groups will be rolled out.  Budget 2025 will be a critical platform for implementing these initiatives.

In short, the coming year will be a mixed one. There will be challenges aplenty but also opportunities. We should be cautious but not unduly pessimistic.

Manu Bhaskaran is CEO of Centennial Asia Advisors