Europe remains a serious challenge to global growth despite positive steps made across the eurozone over recent months, Tharman Shanmugaratnam, Singapore’s finance minister, told Emerging Markets on Thursday.
“The capitalization of European banks is a serious challenge, as is the issue of restructuring [Europe’s] debts, which can only happen if their banks are well capitalised,” he said in an exclusive interview at the IMF conference in Tokyo.
“[Europe’s position] remains a very serious challenge to global growth levels,” said Tharman, who is also Singapore’s deputy prime minister. But he added that measures taken by policymakers in recent months must nevertheless be seen as “a real achivement.”
The fallout from Europe’s problems, allied with slowing output in China, are placing new pressure on Singapore’s economy as the Lion City, teetering on the edge of recession, searches for new ways to boost growth and productivity in a new era of lower global economic growth.
On 9 October, Premier Lee Hsien Loong said the city may avoid a technical recession when it posts its third-quarter GDP figures this morning.
Some economists think otherwise. ANZ’s chief Asia economist Paul Gruenwald said Singapore was expected to sink into recession. He blamed Singapore’s economic torpor squarely on another quarter of dreadful economic and trade figures out of the eurozone, one of Singapore’s key trading partners.
Singapore’s concerns are amplified by China’s surprising economic slowdown. “There is no doubt that China’s tradable goods sector is slowing down faster than anyone expected at the start of the year,” Tharman said.
He rebuffed suggestions that China would return to old-fashioned stimulus measures, last seen in late 2008, when Beijing pump-primed the economy using $600 billion worth of state-directed bank loans.
“[China’s leaders] are acutely conscious of not doing what they did four years ago,” he noted. “Stimulus worked then but it also led to significant imbalances. They want to avoid using those measures again.”
Instead China, whose coastal economy is now deeply wedded to Singapore’s market in services and high-end manufactured goods, would increasingly skew its economy toward domestic consumption and private enterprise and away from state run firms – though he added that this process would be a very “long-term shift”. He said Beijing was unlikely to experience a hard landing as the economy slows.
While Singapore “cannot insulate itself” against global headwinds, city leaders were adjusting to changing and challenging economic conditions. “As a small economy, there are always new sources of demand,” he said.
Singapore has also spent the past nearly three years seeking to boost productivity at home, in the aim of creating new avenues of economic and trade growth without being forced to import more external labour.
This attempt to boost the economy by seeking out fallow areas within the economy was bearing fruit, but there was “more still to do,” he said, noting that labour productivity and efficiency were far higher in advanced Western markets such as Switzerland.
There were some bright points, the finance chief noted. Southeast Asia’s economies are booming: this week the World Bank raised its full year 2012 GDP forecast on several regional economies including Thailand and Philippines.