ECONOMIC OUTLOOK FOR 1991

In November last year, the Ministry of Trade and Industry's forecast is that growth for 1991 would be 3-6%. A slowdown was expected in view of the general decline in growth rates in the major industrial countries. Since the 1985 recession, our economy grew at 8-11% each year during 1987-90, which is above our long term sustainable growth rate of 4-6%. However, growth has been slowing down gradually since the first quarter of 1988, when it was 12%, to 7.8% in the second quarter of 1990. It would have slowed down further even without the Gulf crisis.

The Gulf crisis added more uncertainty to prospects for 1991. When Iraq invaded Kuwait in August, one of the immediate effects was a jump in oil prices. As oil price hikes contributed directly to two previous world recessions, fears that the world would be plunged into another recession were widespread.

The slowdown of the major economies was confirmed by the fourth quarter results of the US which recorded its largest negative growth of 2.1% since the 1982 recession. The major OECD countries all experienced slower growth in 1990 and the trend is expected to continue into 1991. Fortunately, the regional economies, particularly Thailand, Indonesia and Malaysia, are growing strongly. Their buoyant economies will help to sustain economic growth in this region. This was one reason Singapore's growth remained fairly steady in the second half of 1990.

The major uncertainty in November was the possibility of a war and its impact on economic growth especially the price of oil. War broke out in January. However, it did not have the impact on oil prices and industrial production which had been expected. In fact, oil prices fell, and stock markets around the world rose. The recession in the US is expected to be short and mild. Germany and Japan are expected to register positive growth in 1991. Combined with strong growth in the ASEAN region, the outlook for economic growth in 1991, although still far from certain, is on the whole less gloomy than it was in November 1990.

The latest surveys of business expectations conducted in December 1990 before the beginning of the war show industrialists and businessmen to be generally pessimistic about the economic conditions in the next six months. Since the start of the Gulf war on 17th January, the number of travellers to Singapore fell significantly. Business in the commerce and retail sectors has been adversely affected, with hotel occupancy rates dropping sharply and retail sales down.

Our export-oriented sectors will be directly affected by any slowdown in global demand. Overall growth in the manufacturing sector is likely to be steady, but lower than that of 1990. Prospects for the commerce sector are dampened by slower growth in tourist arrivals and lower consumer confidence. However, regional trade is expected to grow in line with growth in the regional economies. The construction sector is expected to perform well because of orders contracted in the previous year. Finance and business services, which has been the fastest growing sector, should perform well even if it does not register the high growth rate achieved in 1990.

Taking all these factors into account, in 1991 the economy should have no problem in achieving the originally forecast growth rate of 3-6%. However, we need to remain vigilant as future performance will depend on how quickly the Gulf situation is resolved.

We must be prepared for quick changes in the economic environment. I urge employers and employees to continue with their efforts to adopt a flexible wage system so that rewards for workers can respond quickly and flexibly to changing economic circumstances. Although Singapore does not expect to enter a recession in 1991, wage increases this year should be moderate in the face of the general slowdown and uncertain economic prospects.

In addition, wage increases should take into account adjustments in CPF contribution rates. Since 1986, the employers' contribution rate has risen by 6(r) percentage points to reach 16(r)%. Employees' contributions now stand at 23%. We are still some way from the long-term target of 20% contributions from both employers and employees. As we expect the Singapore economy to grow moderately this year, we should not postpone a further cautious adjustment to CPF contribution rates.

Therefore, with effect from 1st July, 1991, the employers' CPF contribution rate will be increased by 1 percentage point to 17(r)%. The employees' rate will be reduced by half a percentage point, from 23% to 22(r)%. The total contribution rate will increase by half a percentage point, to 40%.

On their own, these adjustments will raise labour costs, but the effect will be small compared to the annual rise of around 9% in prevailing wages. Furthermore, provided employees and employers take the CPF adjustments into account in wage negotiations, our overall competitive position should not be adversely affected. I would like to remind them that CPF increases are part of wages, and encourage them to conduct their collective bargaining accordingly.