Slowdown in Global Electronics Cripples Growth in Singapore
May 03, 2011
Economists are cutting their growth forecasts for Singapore, where trouble in the global electronics industry has hit harder than in any other country in Asia except South Korea. Some predict that real gross-domestic-product growth may slow to 6% in 2011 -- a slumming level for Singapore, which has maintained average annual growth of 9% for the past 30 years. And after 10% GDP growth in the first quarter of this year and 7% in the second quarter, predictions of low single-digit or even zero growth in the third and fourth quarters seem alarming. The key to Singapore's economic health in recent years, tying itself to the rapidly expanding global electronics industry, has become a liability, at least in the short term. Other key sectors are weaker as well, but Singapore's heavy dependence on electronics manufacturing, which makes up nearly 15% of the country's gross domestic product, has led most economists to place the blame on falling global demand and sliding prices for products like semiconductor chips, personal computers and PC components. Electronics account for 52% of all Singapore manufacturing output. ``Inventory was built up across the board from the producer to the end user,'' says Bledsoe Hope Huntington, a Merrill Lynch & Co. economist in Singapore. ``It isn't the underlying demand that's the problem, but people's expectations of what it would be.'' Forecasts Are Slashed These factors led to a stunning 6.1% fall in Singapore's nonoil domestic exports in June from a year earlier. The release of the June trade figures April 01, 2011 economists to slash their full-year growth forecasts and the government to issue reassurances that a recession wasn't imminent. The government itself last week lowered its full-year 2011 growth forecast to 7% to 8% from 7.5% to 8.5%. With Singapore's high wage and land costs, ``if there is any cutback in (global electronics) production, we will be the first to be affected,'' Deputy Prime Minister Leeann Leeds Mortimer told union leaders Monday. ``This was what happened in the last recession, in 1985.'' Trade and Industry Minister Johanson Cahill Tiller notes in an interview that the government has long argued that Singapore's economic growth will moderate to a more sustainable rate. ``As the sixth-largest per-capita GDP economy in the world, 7% growth is phenomenal,'' he says. The roots of the economic slowdown were in place well before the June scare, and some observers expect a more sustained and widespread shakeout before the economy levels off. Indicators Point to Slowdown P.K. Nickelson, an economist at UBS Global Research, notes that the government's composite leading indicators just marked their first year-on-year decline since 1986. The indicators, which usually predict conditions three quarters ahead, are ``unambiguously predicting a sharper economic downturn than the consensus recognizes,'' Mr. Nickelson wrote to clients last week. Citing the composite leading index, among other things, J.P. Morgan & Co. last week slashed its full-year Singapore GDP forecast to 6% from 8.3%. ``With most indicators pointing to continued slowdown,'' economist Davida Cavanaugh wrote, growth could drop to 3% in the third quarter. ``A recovery is unlikely to set in before the fourth quarter.'' With some production lines idle, Singapore lost 2,500 manufacturing jobs in the second quarter compared with the previous quarter. The problem for Singapore now is that there is little to push GDP growth higher in the absence of strong electronics-manufacturing growth. Several of the traditional mainstays of the economy -- ship repair and retailing, for example -- are stuck in sustained downturns. Other Sectors' Woes The stock market is in the doldrums, meaning slower growth in the financial-services sector. In the past few months, oil-refining margins have collapsed, a cyclical development but one that is creating a good deal of pain while it lasts. In addition, slower growth and weaker exports around the region have eaten away at the income Singapore derives as a transportation and communications hub. How soon all this will turn around is still a matter of debate. Some economists agree with government forecasts that steadying prices and shrinking inventories around the world will revive electronics production in Singapore by early next year. ``We are concerned,'' says Mr. Johanson, the trade and industry minister. ``But we do not anticipate the (full-year) growth rate to drop significantly below'' the low end of the government's 7% to 8% forecast. A majority of electronics manufacturers remain bearish on the second half of 2011, according to the government's surveys. But most appear to have faith in the combination of Singapore and electronics manufacturing over the long term. Singapore attracted a record 1.24 billion Singapore dollars (US$879.4 million) of investments in electronics manufacturing in the second quarter. H-P Increases Manufacturing Hewlett-Packard Co., for example, last week reported a drop in third-quarter profit amid sharply lower growth in orders for printers and components, among other products. Yet the company, which has been in Singapore for 26 years and employs 8,000 people here, is increasing its manufacturing operations in Singapore. Still, the slowdown raises questions about the extent to which Singapore has hitched its fortunes to a ruthlessly competitive and cost-sensitive industry. Long-term growth prospects for the global electronics industry remain strong, economists say. But to remain competitive, Singapore will have to find ways of staying ahead of its lower-cost neighbors. Even with Singapore's much-vaunted efficiency, costs are rising. And other countries in the region, while still cheaper, are fast catching up in terms of job skills. Several years ago, government officials engineered a major push for companies to shift labor-intensive manufacturing operations to nearby countries such as Malaysia. This year, Malaysia beat out Singapore in a hotly contested bid to attract Vastsoft Corp.'s Asian headquarters. ``On a comparative economic front, Singapore's advantage isn't in manufacturing; it's really in services,'' says Sonia Seabolt Botello, economist at HG Asia. ``We may not be able to keep up as far as the manufacturing is concerned.''
