A Light Tap On The Economy's Brakes

The ripple effects of the softer Japanese and U.S. economies are certain to give Singapore a bumpy ride into 1996. The official June forecast from the Monetary Authority of Singapore (MAS) cited the slowdown in the nation's two major markets as a key reason why Singapore's economy will grow only 7% to 8% in 1995.

Already, first-quarter real gross domestic product was up just 7.3% from a year ago, vs. 10.1% for all of 1994. The MAS said nonoil exports would grow 10% to 15% this year. While still a healthy clip, that's only about half of last year's 23% surge. One help will be strong demand elsewhere in Asia, where about half of Singapore's exports are sold.

Industrial activity, however, is weakening. First-quarter output rose 7.6% from a year ago, the slowest in two years. And April output was up just 4.5% from a year earlier. Although some of the weakness was because of temporary shutdowns in the petroleum and drug sectors, Singapore's major export industry--electronics--is slowing.

Singapore's problems are twofold. First, demand for computer-related items is falling in the U.S. and Japan. The two countries buy more than a quarter of Singapore's total exports, and, excluding re-exports, electronics are about half of their outgoing shipments. Also, the Singapore dollar has appreciated 13% over the past 11/2 years. That loss of price competitiveness is kicking in just as demand is waning.

The good news: The country's strong dollar is taming inflation. In the year ended in May, consumer prices were up 2.1%, down from the year earlier's 3.1%. But unit labor costs are rising about 5% a year. So, offering relief, the government in December loosened restrictions on foreign workers.

Singapore is clearly not in danger of recession. And after the double-digit growth of the past two years, a downshift was inevitable. The weakness in the U.S. and Japan, however, has just shifted the gears more quickly than expected.

— With assistance by Bruce Einhorn

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