STATE OF ECONOMY AND HIGH OIL PRICES

STATE OF ECONOMY AND HIGH OIL PRICES: 1.

Mr Inderjit Singh asked the Minister for Trade and Industry if he can provide an update on the state of the economy, especially after the recent downward revision of the projected growth numbers for 2005.

2.

Dr Amy Khor Lean Suan asked the Minister for Trade and Industry (a) whether our economy has been and could be further affected by persistently high oil prices; (b) if further downward revisions on our economic growth forecast this year are likely; and (c) how will this affect job prospects.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I have your permission to take Question Nos. 1 and 2 together?

Mr Speaker: Yes.

Mr Lim Hng Kiang: Mr Speaker, Sir, in May, the MTI revised its forecast for economic growth this year to 2.5% to 4.5%. This was a downward revision from the earlier forecast of between 3% and 5%.

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Two main reasons accounted for this revision. First, output of the biomedical manufacturing cluster was expected to weaken this year, following a 26% gain in 2004. This reflected planned changes in the production mix of pharmaceutical output this year.

Second, a number of developments - especially high oil prices - had pointed to less buoyant economic growth for some of our major trading partners this year.

Data available since the revision showed that lower output in the biomedical manufacturing cluster continued to persist. Oil prices have also risen past the US$60 per barrel mark since early July. Higher oil prices led a few major economies to downgrade their GDP growth forecasts or issue warnings of likely economic weakness recently.

Nevertheless, based on our early estimates, we expect the second-quarter GDP growth to be better than the first quarter's, at about 3.9% compared to 2.8%. This reflected stronger support from the services sectors, particularly the wholesale and retail trade sector.

With economic growth for the first half of 2005 at an estimated 3.4%, MTI continues to expect full year growth to fall within the forecast range even if oil prices are maintained at current levels or even slightly higher to the end of the year.

As an oil importing economy, Singapore cannot escape the negative impact of high oil prices. However, unlike previous oil shocks, we expect the impact of the current high oil prices to be tempered. During the oil shocks of the 1970s and the 1980s, high oil prices were the results of abrupt supply disruptions, and they led to widespread economic recessions. In contrast, the high oil prices we face today are due to

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strong economic growth in two of our major export markets - the US and China. The demand for oil to fuel their economic growth has strained existing oil producing and refining capacities globally, leading to upward pressures on prices. But this same growth also boosts the external demand for goods and services produced here, helping to support Singapore's economic growth.

Oil prices are likely to remain high into the foreseeable future, due to the lead time needed for capacity expansion in the oil industry. But as long as high oil prices are the result of strong demand, economic growth should continue in Singapore. At this point, MTI also does not foresee the impact on the labour market here to be severe.

A clearer picture of the economic outlook will emerge over the next few weeks as more data concerning second quarter growth comes in. MTI will release the details of second quarter economic performance after National Day. It will also announce the latest forecast for full year growth for 2005.

Mr Inderjit Singh (Ang Mo Kio): Sir, I would like to ask the Minister on the outlook for manufacturing, particularly electronics manufacturing, in light of a few closures of some multinational companies who are relocating from Singapore to other countries. Is this trend increasing or do we see manufacturing strengthening again in Singapore?

Mr Lim Hng Kiang: Mr Speaker, Sir, manufacturing output for the first half of this year remains soft compared to last year. This is because last year we had a very high base of growth. This year, for the first half, we are growing at below 4%. But we expect the second half to be better and we therefore expect manufacturing to contribute significantly to our growth forecast of 2.5% and 4.5%.

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Looking forward, we expect manufacturing to continue to play an important role in Singapore by contributing between 25% and 27% of our GDP. There will be some relocations of the low-end value-added sectors but we have a very strong investment pipeline and investments continue to be very vigorous in the manufacturing sector generating good jobs for Singaporeans. So the outlook for manufacturing remains positive.

Dr Amy Khor Lean Suan (Hong Kah): Sir, I would like to ask the Minister if the improved growth in the second quarter, which was driven by the services sector, is likely to be sustainable, going forward into the rest of the year and, also, if there is any evidence that the SMEs are more hard-hit by the negative impact caused by oil prices.

Mr Lim Hng Kiang: Mr Speaker, Sir, I believe our economy is as diversified as you can make it to be and, therefore, as we go forward, we expect some sectors to suffer from low growth but other sectors to be buoyant. In this way, we continue to achieve our medium term growth prospects.

Going forward, the services sector looks promising, particularly the tourism sector is experiencing very good growth. Business and financial services are also doing well. There is no reason for us to think that the services sector should slow down significantly going to the second quarter. We continue to look forward to the contribution of the services sector towards our economy.

I think, overall, the Singapore economy is performing reasonably well. We must not expect a repeat of last year's very high growth. This year, we expect growth to consolidate and therefore 2.5% to 4.5% growth is a very decent performance.

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Mr Inderjit Singh: Sir, could the Minister elaborate a bit on the biomedical sector? I could not get a feel of whether this was a short-term downturn or it was a volatility that we did not expect. Or is it expected to decline further? If the Minister could give us an insight of how this sector is going to perform, it will be useful.

Mr Lim Hng Kiang: Mr Speaker, Sir, we have explained the volatility faced by our biomedical cluster several times. First of all, the biomedical cluster contributes about 5% of our GDP. It is not a small sector. But, unfortunately, the plants that we have are producing active pharmaceutical ingredients and this tends to be done on a batch basis. It is not a continuous sustained production, ie, they produce batch by batch. So every time there is a major run, we see very good growth. As they retool the manufacturing plants to cater for the next batch, there is a period in which the output slows down.

Last year, for example, a few plants came into operation and that gave us a very high growth. This year, if we can continue to sustain that same output, I think we would have done very well. But that means the rate of growth is not there and, again, because of this batch production, we do see some quarters showing a negative output. But this is the nature of the biomedical cluster in Singapore. The volatility will reduce as we grow the base of the biomedical sector to include contributions from the biotech sector and the medical devices which tend to be more steady. But if we are producing the active ingredients, then we have to ride this volatility.

Mr Leong Horn Kee (Bishan-Toa Payoh): Sir, I would like to refer the Minister to the figure he mentioned about our GDP growth is likely to be 2.5% to 4.5%. He said earlier that MTI may give a closer forecast. Could the Minister affirm that figure?

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I would also like to ask him whether there are any other bright spots that he can foresee coming up this year. For example, would there be a recovery in the construction sector?

Finally, would there be any follow-through impact as we expect to see coming soon from the construction of the two integrated resorts?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I have explained, we have already achieved 3.4% growth for the first half. So that is squarely in the middle of the band in our forecast range of 2.5% to 4.5%. Going forward, we will get the data of the second quarter over the next few weeks and therefore we should be able to confirm the second quarter growth figures by mid-August. I think if that figure confirms our flash forecast, which is what we put out recently - the 3.9% growth for the second quarter is just a flash estimate - then I think we have a very solid first half growth.

We do not expect to see a significant downturn in the second half. We need a very big downturn to bring us below the 2.5-4.5% range. If any of the Members were to do their arithmetic, with 3.4% growth in the first half, we are obviously in a very good position to achieve at least 2.5% growth for the year.

As for achieving the higher end of the range, it will depend on a few sectors that may pick up. The manufacturing sector looks very strong. As Members know, our marine engineering companies still continue to get good orders and good growth. Among the manufacturing sector, the electronics sector, some analysts think that the second half will be better than the first half. By and large, we do not see a significant slowdown. In fact, the assessment is that the second half ought to be better than the first half. So

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we can be cautiously optimistic about the growth prospects for the whole year.

As for specifics, like the construction sector, I think this will really have to depend on growth in the private sector. The Government projects are already in the Budget book and so people in the industry know what are the projects in the pipeline.

As for the impact of the integrated resorts, the physical construction will not take place till one or two years down the road. So it will not have an impact on this year's figures.

Mr Inderjit Singh: Sir, for the little growth that we are expecting this year, does the Minister expect the growth to add any significant number of jobs or are we going to see a jobless type of growth?

Mr Lim Hng Kiang: Mr Speaker, Sir, we expect the employment creation to be similar to what we have, ie, commensurate with a growth rate of around 2.5% to 4.5%. It will not have the kind of job creation that we saw last year. But at the same time, we expect to see good job creation this year.