PART I REVIEW OF THE ECONOMY

Economic Performance in 2000

We are starting off on a good footing in the new millennium. Last year, our economy outperformed expectations and grew by 9.9%, a rate not exceeded since 1994. [The economic growth rate in 1994 was 11.4%.]

All sectors enjoyed higher growth in 2000. In particular, manufacturing, wholesale and retail trade grew by a strong 15%. Financial and business services rebounded from marginal growth in 1999, to 4.1% and 6.6% respectively. The contraction of the construction sector continued, but was less severe than that in 1999, and showed signs of reversal.

Strong external demand was the cause of growth. The world economy is estimated to have expanded by 4.7% in 2000, the highest growth rate in 12 years. In particular, the US economy was the key driver behind global demand. The bursting of the dot-com bubble did not stop the US from registering a stellar growth of 5.0% last year.

Electronics, which was a major engine for the recovery in 1999, continued to take centre-stage in 2000. Global semiconductors sales surged by a remarkable 31%, up from 19% in 1999. This gave our manufacturing sector a strong boost, with major downstream benefits for many other sectors.

Year 2000 was also a great year for investment promotion. Manufacturing investment commitments reached a record $9.2 billion. Many of these were in key knowledge-intensive industries like pharmaceuticals and high-end electronics that will position us well for future growth. EDB also secured $1.9 billion of commitments in total business spending for services last year. Against the uncertain political environment in Southeast Asia and competition from China, the achievements of EDB were especially remarkable.

Our job market benefited from the strong economic growth in 2000. More than 110,000 jobs were created, far surpassing the 40,000 in 1999. Retrenchments tailed off, falling from 14,600 in 1999 to 11,500 last year. As a result, the seasonally-adjusted unemployment rate fell to 2.8% in December 2000.

This strong economic performance was due not only to fortuitous external developments, but also to our sound economic policies and the hard work of Singaporeans. Full credit should go to our workers, who have patiently put up with the CPF cut. This was instrumental in retaining investor confidence and enabling our industries to stay globally competitive, as we rode out the Asian economic crisis. In recognition of the strong growth, another 4%age points have been restored to the employers' CPF contribution rate last month, bringing it to 16%.

But while our overall economic performance was very good, not all businesses benefited. Besides the construction sector, some industries like wood and paper products, and retail segments such as watch, jewellery and neighbourhood shops, did not do well. Many SMEs were not able to benefit from the strong global demand. The robust growth was also not reflected in the asset markets. The STI ended 22% lower last year, while the residential property price index dipped 1.0%. Outlook for 2001

We cannot repeat the exceptional performance of 2000 this year. While the overall outlook for 2001 remains fair, we must be prepared for slower growth.

External economic prospects have become less rosy. The US economy has decelerated quite sharply in the past few months. Poorer corporate results and weak stock markets have begun to feed through to slower consumption and investment. The chances of a hard landing have increased, prompting the Federal Reserve to cut interest rates by 100 basis points so far this year. The consensus is that the US economy will grow by only 2 to 2.5% this year. But if it turns out lower, we will be in for harder times ahead.

The Japanese economy is expected to remain weak this year. In fact, its recovery is beginning to show signs of stalling. Household expenditure has remained anaemic due to job worries and continuing deflation. Japanese exports are already slowing on the back of weaker US demand. These could in turn dampen business investments.

Fortunately, growth in Europe should be able to provide some support for the slowing external demand. Although growth in Europe peaked last year, it should remain healthy at about 3% in 2001, underpinned by robust consumption.

Similarly, global electronics demand will moderate from its stellar growth of last year. Some industry watchers expect sales of semiconductors to slow significantly from the heady 31% growth last year to just 5-10% this year. But continued healthy demand in segments such as PCs and telecommunications products will provide some support for growth in the electronics sector.

The slowdown in the US economy and electronics demand will affect the region. While Asia has, by and large, bounced back from the crisis, it has not yet been nursed back to full health. Asian banking systems remain weak, and there is still much restructuring to be done. In several Asian countries, internal political problems add to their complications.

We need to keep a close watch on the dark clouds looming in the horizon. But there is no ground for excessive gloom. Domestically, the composite leading index continues to point to growth ahead. The business expectations survey shows that firms in the financial services, catering and hotel segments expect business to improve in the next 6 months. While manufacturers have turned cautious about growth prospects in the next 6 months, the new plants coming on stream this year in the electronics, chemicals and life sciences industries will help to buttress growth. The construction sector is also bottoming out and looks set to register positive growth this year.

Although the global economy is likely to become more volatile, we are well positioned to ride out the fluctuations. Our restructuring efforts and upgrading over the years have paid off and we now have a more diversified and resilient economy. We have a strong manufacturing sector and a good spectrum of thriving services. Our domestic exports are fairly well spread out among the major markets of United States, European Union and Asia. Although we have a dominant electronics sector, we are steadily building up our chemicals cluster. Even within electronics, there is strong diversification. Semiconductors and telecommunications equipment have emerged as new growth drivers, as our production share of disk drives and PCs declines. The external wing of our economy is firming up and regionalisation efforts are paying off. Income from abroad has risen by more than 8% on average for each year between 1990 and 2000. This provides a supplementary source of earnings for our economy.

It is this broad and robust economic base which has enabled us to emerge from the Asian economic crisis relatively unscathed. In fact, in relative terms, we have come out of the Asian crisis stronger and are able to start the new millennium on a solid footing. With this year's budget, the Government will continue to facilitate the upgrading and restructuring of our economy.

For this year, taking all factors into account, the Ministry of Trade and Industry forecasts a growth of 5 to 7%. But if the external environment turns for the worse, it can have a substantial impact on our growth, given our very open economy. We will continue to monitor the situation closely.