FORECASTS FOR THE SINGAPORE ECONOMY

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1 REGIONAL OUTLOOK FORUM Tuesday, 8 January 2002 Shangri-La Hotel, Singapore FORECASTS FOR THE SINGAPORE ECONOMY Presented by Tilak Abeysinghe and Choy Keen Meng Econometric Studies Unit Department of Economics National University of Singapore This paper is available at the ESU website:

2 INTRODUCTION "Whatever you think it will be, it will always be something different." The Buddha The Singapore economy is mired in a deep recession. The Econometric Studies Unit (ESU) reckons that the economy contracted by about 2% in 2001, in line with the Ministry of Trade and Industry s (MTI) flash estimate of a 2.2% shrinkage. However, we predict a recovery to positive growth of about 4% this year contingent on a steady pick-up of economic activity in the US and other key trading partners of Singapore, and a rebound in global electronics demand. At worst, the Singapore economy will register flat growth in In making these forecasts, we have relied heavily on a new macroeconometric model 1 for the Singapore economy, supplemented by subjectively adjusted inputs from the ESU Multi- Country Model and time series projections. We will first present some findings pertaining to the tourism sector of the Singapore economy and then move on to announce our forecasts for 2002 and TOURISM: A KEY PILLAR OF THE SERVICE SECTOR Tourism is a major service sector that the government is focusing on in its restructuring efforts to provide a more stable growth path for the Singapore economy. Travel, transportation, hotels, restaurants, tour sites and retail trade services depend heavily on tourist dollars. Our work in developing a demand model for tourism led to some useful observations and findings which we would like to highlight here as these may be helpful in formulating long-term policies to promote the sector. Empirical studies on tourism usually focus on visitor arrivals simply because data for the latter are readily available. However, a more meaningful analysis of the impact of tourism on economic growth requires an analysis of visitor expenditures. The statistics collected by the Singapore Tourism Board (STB) show that the average length of stay of a tourist in Singapore has been about 3 4. This is an exceptionally short stay compared to other countries in the region. Average expenditures per visitor have also fallen over time, as Table 1 shows. To compensate for these long-term trends, Singapore has to rely on a bigger volume of tourist inflow. 1 The new model has yet to go through a thorough scrutiny to evaluate its forecasting performance and dynamic multipliers. 2

3 Table 1: Average Expenditure (S$) Per Tourist in Singapore by Country Country 1991/ /98 India ASEAN USA France Canada Australia UK New Zealand South Africa Italy China PR Hong Kong Japan Netherlands Germany Switzerland Taiwan Korea Rep All visitors Note: The countries are ranked by their expenditure in 1997/98. Source: Singapore Tourism Board. With very little data available, we were nevertheless able to assess the impact on (i) visitor arrivals; (ii) total visitor days; and (iii) total visitor expenditures of the following variables: 1. Real income of visitors measured by the real GDP s of their home countries. 2. Tour costs in Singapore measured by the local living cost relative to that of the home countries. 3. Tour costs in substitute or competing destinations relative to that of the home countries. Since Thailand is the most popular tourist destination in this region, we use Thailand as the substitute destination for visitors to Singapore. 4. Visitor arrivals to the ASEAN-3 countries of Indonesia, Malaysia and Thailand. 3

4 Table 2 provides elasticity estimates (bold figures) which indicate the responses in visitor arrivals, visitor days and visitor expenditures of European visitors to a 1% change in each of the above variables. 2 The key results are the following: Compared to visitor arrivals, visitor days and visitor expenditures are highly income elastic. A 1% drop in the incomes of the visitors leads to about 6% fall in visitor expenditures. As a result, tourism earnings are highly cyclical and fluctuates in tandem with global economic cycles. In other words, as a key industry in the service sector, tourism will not provide the much needed counter-cyclical force for the Singapore economy. The procyclicality of the industry may be mitigated by attracting more visitors from India and China as these economies have shown more resilience to the current global downturn. Moreover, Table 1 shows that Indian visitors are big spenders in Singapore. The second most important factor, particularly relevant for visitors from distant origins, is what we call the neighbourhood effect measured by visitors to the ASEAN-3 countries (Indonesia, Malaysia, and Thailand). This has a highly significant impact on visitor arrivals and expenditures. A 1% increase in visitors from Europe to ASEAN-3 will increase visitors to Singapore by about 0.7%. In other words, out of 10 visitors to ASEAN-3 from Europe, seven also visited Singapore. The impact of these tourists on visitor expenditures is quite large: the income effect brings about a 6% increase in visitor expenditures while the neighborhood effect adds another 1.6%. These results highlight the complementary nature of the tourism industry within the region and the importance of cooperation in the formulation of tourism development strategies. While the neighbourhood effect demonstrates the complementarity of tourism in the region, the cost variables show that the neighbours are competitors for tourist dollars at the same time. A 1% increase in the cost of living in Singapore reduces expenditures of European visitors by almost 2% as these visitors get diverted to substitute destinations. As a matter of fact, Singapore is the most expensive tourist destination in Southeast Asia, primarily because of the appreciation of the Singapore 2 A detailed analysis is available in Kahn, H. and Abeysinghe, T. (2001), Tourism in Singapore: Past Experience and Future Outlook in Singapore in the 21 st Century: Issues and Strategies, edited by Chng, MK, Hui, WT, Koh, AT, and Rao, B, McGraw-Hill (Forthcoming). 4

5 dollar relative to the other currencies in the region. Visitors, therefore, cut short their stay in Singapore and move to less expensive tourist destinations in the region. Because of falling expenditures per visitor, Singapore has to rely on a larger volume of visitor arrivals to maintain the same amount of earnings from tourism. This strategy will face the natural limits imposed by the physical constraints of Singapore. Instead of 8 million visitors who stay 3 days, 6 million visitors who stay 4 days would be a more desirable outcome. Therefore, considerable attention needs to be given to strategies that could extend the length of visitor stay and increase visitor expenditures in Singapore. Table 2: Effects of Key Variables on European Visitor Arrivals, Visitor Days and Visitor Expenditures in Singapore (Bold Figures %) Real Income of Living Cost Living Cost at Substitute Visitors to Error Correction visitors in Spore Destination ASEAN-3 Term R 2 DW Visitors (1.01) (1.85) (1.57) (2.88) (2.86) Days 5.28 (1.75) (2.82) 3.45 (3.37) 0.51 (1.08) (1.72) Expenditure 6.17 (1.60) (1.66) 2.63 (2.13) 1.64 (2.78) (1.01) Notes: Numbers in parentheses are t-statistics. ASEAN-3 consists of Indonesia, Malaysia and Thailand. 5

6 KEY ASSUMPTIONS I: GLOBAL ECONOMIC OUTLOOK Table 3 sets out some of the key assumptions we made in generating our forecasts for the Singapore economy. The annual GDP growth projections given in the table for Singapore s major trading partners were obtained by running the ESU Multi-Country model and then adjusting the resulting forecasts subjectively to reflect current market expectations. The most critical of these projections is the rate of US economic growth this year. It is still far from clear what the outcome on this score is likely to be, as evidenced by the wide dispersion of private sector and institutional forecasts ranging from about -1% to 4%. But at the minimum, reasonable forecasts for 2002 and 2003 should take into account the apparent recovery from the Sept 11 terrorist attacks and the substantial fiscal and monetary stimuli in the pipeline. We will address some of the perceived downside risks later. In the benchmark projections employed here, we have assumed that there will be an early recovery from recession and that GDP growth will average 2.3% in 2002 on the back of a vigorous rebound during the second half of the year. For next year, growth is projected at 3.4%. Table 3: GDP Growth Projections for Singapore s Major Trading Partners (% change against the same quarter of the previous year) Country 2001* Malaysia Indonesia Thailand Philippines South Korea Taiwan Hong Kong China Japan US Rest of OECD * based on forecasts for Q4 6

7 As a result of this relatively sanguine outlook, the global economy stands to benefit from the locomotive effect provided by the US economy. Except for Japan, the rest of the OECD will be pulled along a recovery path with growth reaching 1.8% in 2002 and 2.2% in The Japanese economy is the sole laggard in the industrialized world as it is envisaged to stagnate and deflate over the next two years, which is by no means the most pessimistic outcome. Where the regional economies are concerned, the star performers this year will be the Northeast Asian countries South Korea, Hong Kong and China. Indeed, Korea and China have been amongst the countries least affected by the present economic downturn, partly because of the greater importance of domestic demand in their overall expenditures. They are anticipated to grow by 5.6% and 7% respectively this year. Even Taiwan is expected to grow by 2.6% in 2002 after shrinking by a roughly similar margin in 2001 while Hong Kong is projected to grow at a rate of 3.4%. In all four countries, GDP growth will accelerate in 2003 as the global economy recovers fully from the current slump. Similarly, Southeast Asia will fare less well in 2002 and better in Although expected to grow by about 3.5% and 4.2% respectively this year, the Philippines and Indonesia are susceptible to socio-political malaise. If political stability can be assured, they should turn in a more sterling performance next year. Thailand, whose economy is tipped to expand by 3.4% in 2002, is likely to regain some of its output potential next year with a growth rate of 5.5%. Like Singapore, Malaysia is a potential beneficiary of a generalized recovery in the global demand for electronic products and may yet provide a surprise on the upside. It is forecasted to grow by 6.2% in 2002 and an even higher 7.5% in KEY ASSUMPTIONS II: OTHER EXOGENOUS VARIABLES Table 4 lists the assumptions on the other major exogenous variables found in the ESU econometric model. Needless to say, these are more in the nature of speculative conjectures rather than objective forecasts; consequently, the uncertainties surrounding them will add to the margin of error in our eventual forecasts of Singapore s GDP growth. Table 4: Other Exogenous Assumptions Variable 2001* Global chip sales, % change Brent crude oil price, US$/barrel (average)

8 Residential property prices, % change Construction contracts awarded $11.3b $12.7b $12.7b Total visitor arrivals 7.5m 7.7m 8.0m Prime lending rate (average) 5.7% 5.7% 5.8% Exchange rate, S$/US$ (average) Employer CPF rate 16% 16% 18% Corporate tax rate 24.5% 24.5% 24.5% * based on forecasts for Q4 The assumptions for global chip sales, which play an important role in our forecasts, are broadly aligned with the Semiconductor Industry Association s (SIA) prognoses that the worldwide semiconductor industry will grow by 6.3% in 2002 and 21% in This comes on the heels of a palpable turnaround in the global electronics cycle in the final months of 2001, as witnessed by the improvement in chip sales on a three-month moving average basis (Figure 1). Time series model forecasts of sales using the lead provided by US new orders of electronic components and accessories corroborate this conclusion. Furthermore, the book-tobill ratio for semiconductor equipment rose to 0.73 in November, suggesting that capital spending in the chip industry is recovering gradually M M2000 Forecasts of Global Chip Sales (Growth Rates of 3-mth MA) 05M M M M M M M M M M M2002 Forecasts 8

9 Brief remarks on the other exogenous assumptions are in order. In the ESU macroeconometric model for Singapore, the price of crude oil has a tremendous influence on variables measuring price inflation, including the consumer price index (CPI). We have anchored the benchmark Brent oil price at US$25 a barrel for all our forecast horizons to conform to OPEC s declared objective of maintaining a target price range of US$ The other key variable affecting domestic inflation is the Singapore-US dollar exchange rate, which is assumed to hover around the value of S$/US$1.80 for the next two years. The incipient recovery in residential property prices has its roots in the belief that the real estate market has bottomed and buying momentum may fuel a mild rebound from this year onward. This, together with accelerated infrastructure spending by the government, are expected to boost the value of construction contracts awarded to S$12.7 billion in both 2002 and In tandem with a global economic upturn and fading memories of Sept 11, total visitor arrivals are assumed to increase by 2.4% this year and 4.4% next year, following a 2.1% contraction in The domestic prime lending rate is not seen to fall any lower during the rest of the year given historically low world interest rates; instead, it inches up marginally some time in 2003 as the US Federal Reserve reverts to a tightening stance. Similarly, the employer CPF contribution rate is assumed to be partially restored to 18% by the second half of next year as the Singapore economy picks up steam. However, the corporate income tax rate is presumed to be kept at its present level of 24.5%. MACROECONOMIC FORECASTS FOR SINGAPORE Our key forecasting assumptions, as described above, have set the stage for a robust rebound of the Singapore economy over the course of this year. Real GDP growth should have bottomed out at -7% in the final quarter of last year, resulting in an estimated contraction of 2.2% for One, or at most two, more quarters of negative growth will ensue before growth re-enters positive territory in the second half of The detailed forecasts are shown in Table 5 and plotted in Figure 2. 9

10 Table 5: Macroeconomic Forecasts for Singapore (% change against the same quarter of the previous year) 01Q4 02Q1 02Q2 02Q3 02Q4 2001* GDP Private consumption Government consumption Non-construction investment Construction investment Non-oil dom. exports (nominal) Employment** (-1.6) (-1.0) (0.3) (1.2) (1.8) Unemployment rate Nominal wages (monthly) Inflation rate (CPI) * based on forecasts for Q4. **Numbers in parentheses are quarter-on-quarter growth rates. Since we believe that interval forecasts are more meaningful than point forecasts, we have attached confidence bands to the predicted GDP growth rates in Figure 2. To convey the risks associated with the point estimates, these bands are shown as fan charts a visual device for depicting the probability distribution of ex ante forecasts. 3 The calculated 90% forecast interval suggests that economic growth will average out to 3.8% in 2002, but may hit 7.4% under the best scenario and will be flat in the worst-case scenario. Given our assumptions, the confidence interval basically rules out another recession in Moreover, growth is expected to accelerate further to 7.7% in Figure 2: Forecasts of Singapore GDP Growth Each band of a given shade defines a range within which there is a 10% chance of the outcome occurring; the darkest band containing the average outcome represents the peak of the distribution. 10

11 Due to the lower disposable incomes and declines in net wealth implied by the economy s contraction, private consumption expenditures are expected to continue falling in the first six months of this year, after which a modest recovery to 4 5% growth is envisaged. We also foresee a contraction in non-construction investment expenditures of roughly 15% in the first half of Higher public infrastructure spending will, however, cushion construction investment, which is expected to decline by about 4% this year. Non-oil domestic exports, a key barometer of the health of the Singapore economy, should start to grow again in the second quarter of the year by virtue of the assumed recovery in external demand and worldwide chip sales. Growth for the full year is forecasted to be in the region of 15%. In the labour market, the process of employment destruction that began in 2001 Q3 will persist for another year. There is visual as well as econometric evidence that employment growth trails changes in output, thereby making this variable a lagging indicator of economic activity (Figure 3). Although quarter-on-quarter employment growth picks up from the second quarter of this year, the employment level reaches its previous peak only in the fourth quarter. The unemployment rate is subject to the same dynamics, which explains why the seasonally adjusted rate is expected to peak at 4.6% in 2002 Q1 before falling steadily to 3.4% by the end of the year as the economic recovery takes hold. The deterioration in job market conditions is in turn responsible for the projected negative wage growth of nearly 3% in Not surprisingly also, domestic consumer prices are barely seen to be rising this year. Figure 3: Labour Market Forecasts 12.5 Forecasts GDP Growth Employment Growth Unemployment Rate SECTORAL OUTLOOK 11

12 The ESU s forecasts for the major sectors of the Singapore economy are reported in Table 6. Figure 4 shows the close co-movement of the growth rates of manufacturing value-added and non-oil domestic exports (in real terms), although the latter s fluctuations tend to be rather more volatile. We estimate that the manufacturing sector will shrink by about 15% in the final quarter of last year, bringing growth for the whole of 2001 to 10.4%. Looking ahead, the anticipated upturn in exports from the second quarter of this year is mirrored in the recovery of manufacturing industries, which are projected to grow by 4.6% in 2002 and 9% in In terms of product categories, electronics exports are expected to be the main driver of growth while strong pharmaceutical exports should also play a supporting role, as it has done over the last two quarters. In contrast, the construction sector is likely to experience a further contraction of 2.6% this year, on top of a decline of 1.3% last year. This is a delayed consequence of the fall in contracts awarded since late 2000 that was triggered by a softening of the property market. 4 Indeed, a similar shakeout was recorded in the wake of the Asian financial crisis, when the sector shrank for ten consecutive quarters. If not for the government s prospective intervention this time round in the form of an increase in public construction projects, the decline would have been worse. The commerce sector consisting of the wholesale and retail trade and hotels and restaurants segments will be badly hit in the previous and current quarters due to the depressing effects of the Sept 11 attacks on international tourism and consumer confidence. Negative growth of 2.8% is forecasted for However, consistent with our projections that visitor arrivals and private consumption expenditures will rebound later this year, we predict that the sector will grow modestly by 4.8% for 2002 as a whole (Figure 5). 4 We have documented the time profile of the impact of contracts awarded on construction sector value added at last year s ISEAS Regional Outlook Forum (the paper is available at 12

13 Table 6: Sectoral Forecasts (% change against the same quarter of the previous year) 01Q4 02Q1 02Q2 02Q3 02Q4 2001* Manufacturing Construction Commerce Transport and Comm Financial and Business Ser * based on forecasts for Q4 Figure 4: Manufacturing Sector Forecasts Manufacturing Growth Non-Oil Domestic Export Growth Forecasts Figure 5: Commerce Sector Forecasts Forecasts Commerce Growth Visitor Days Growth Pte Consumption Growth

14 The transport and communications sector appears to be relatively insulated from the present recession even though the pace of activity there has been slowing down as well. Underpinned by trend growth in the communications segments, the sector is projected to continue expanding this year at a rate of 4.3%. A similar story can be told for the financial and business services sector, which is expected to grow at a decent rate of 5.1% due to the ongoing liberalization in the banking industry and the anticipated recovery in regional economic growth. CONCLUSION: DOWNSIDE RISKS Conditional forecasts of macroeconomic activity are inherently risky, not to mention the dynamic forecasts we have presented above for individual variables. They are perhaps best viewed as subjective judgements formed with the aid of modelling tools. This is why the possibility of a worst outcome cannot be totally discounted; all it needs is a couple of downside surprises which are beyond Singapore s control to tip the economy into another year of recession. One major risk factor, as far as Singapore is concerned, is an illusory recovery in the electronics sector. Although we have adopted what are essentially industry-based forecasts of semiconductor sales, the speed and strength of the rebound in global electronics demand is subject to considerable uncertainty. Furthermore, should the US economy stumble, the repercussions for world economic growth can be dire. There are a few scenarios that can lead to such an outturn: over-investment in the IT sector, a political deadlock in the US Congress over fiscal pump-priming measures, or repeat terrorist attacks. Barring these risk factors, we are confident that the Singapore economy will be out of the woods by the second half of this year at the latest. 14

THE MACROECONOMIC EFFECTS OF SINGAPORE S INTEGRATED RESORTS: AN ECONOMETRIC SIMULATION

SCAPE Presentation at the SER Conference 4 August 2005 THE MACROECONOMIC EFFECTS OF SINGAPORE S INTEGRATED RESORTS: AN ECONOMETRIC SIMULATION by Tilak Abeysinghe and Choy Keen Meng * Econometric Studies