Word in the New$: trade-dependent sectors

Mar 18, 2017 04.15PM |

by Ryan Ong

BUSINESS Times just published a report on how Singapore may be experiencing a two-speed economy. By that, it means our entire economy is not operating at the same pace; one side of it is doing very well, and the other side is about to grow its hair long and drop out of school. The divergence seems to be between export oriented businesses, which mainly make money from customers abroad, and domestic businesses that rely on a local customer base. Here’s what it all means:

Improvements in the economy and broad-based growth (or the lack of it)

According to the linked report, private sector economists are more optimistic about Singapore’s growth. In December last year, these same economists had predicted that our economy would grow only 1.3 per cent in Q1 2017, and about 1.5 per cent for the whole of 2017. Now, they’ve doubled their estimates to 2.6 per cent for Q1 2017, and are predicting 2.3 per cent growth for the whole year.

So if you trust economists, there’s some good news for you; they think we’re generally doing better. But what isn’t agreed upon is how broad-based the growth will be. In other words, we don’t know if the whole “growing economy” affects every business in every sector. There is a difference between narrow growth, and broad-based growth. For example:

Say there’s a new development that allows solar panels to generate 10,000 times the power they normally do. This results in explosive growth in the manufacturing sector, as everyone scrambles to order them. There will probably also be growth in tangentially related sectors, as the cost of energy starts to decrease. But at the same time, industries that deal with coal and oil will lose money, because their business is now outdated. What we’d probably see is growth in the overall economy, but it’s not broad-based growth. A large number of oil and gas businesses could end up collapsing, even as the numbers show rising GDP growth.

Good broad-based growth means that almost every industry sector experiences growth, and that it’s not just a case of some  sectors growing faster because they cannibalise others. Right now, that may not be the situation. We could be seeing a vast difference in outlook between domestic businesses and…

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Trade-dependent sectors

Trade dependency is mostly a fancy way to say “export oriented”. It’s a little more complex than that, but that definition works most of the time. Trade dependent sectors are industries where the businesses make money selling things abroad. They may do very little business at home, or even none at all.

A classic example of a trade-dependent sector is agriculture, in countries such as Australia. In first world countries, there’s no reliance on subsistence farming (i.e. farming just to feed yourself). Rather, farms are multi-million dollar affairs, which aim to also generate profits by growing and selling their crops. There’s an upper limit to how much farms can sell within the borders of their own country; once there’s more than enough supply, the value of their crops will fall. It then becomes more profitable to sell to other countries, and this is often where the bulk of the profits come from.

Now take a look at this table from the linked article, which shows the economist’s expectations:

Manufacturing got a big jump this year, so it’s no surprise there’s much more optimism there. Manufacturing is mainly export driven (selling semi-conductors and circuitry and such). Non-Oil Domestic Exports (NODX) tracks all exports barring oil, and you can see expectations are up significantly from 0.3 per cent to 6.1 per cent. At the same time, notice that construction, along with accommodation and food services (think hotels and restaurants and the like) are expected to shrink. Also note that these sectors are mainly domestic; the biggest export is probably e-coli from dubious coffee shops.

Note that overall, this is good news; even for local businesses that don’t directly see gains.

Singapore as a whole is a trade-dependent economy, so most of the money we make is from export-oriented sectors. If those sectors don’t do well, domestic businesses will also suffer. It doesn’t matter that you have five million potential customers if they’re all stony broke. Also, we have some control over the growth of domestic businesses. We can alter labour laws, for example, to make it easier for local businesses to hire more manpower (we’re just deliberately not doing so, to curb our long time addiction to cheap foreign labour). What we can’t easily control is the growth of trade-dependent sectors, as the demand for their goods is determined by conditions abroad.

How is this related to the rise in unemployment?

There are two views regarding that particular relationship.

The pessimistic view is that the growth we’re seeing is a temporary spurt; one of those freak incidents, like winning a lottery, and the growing unemployment proves that. After all, if the economy is growing so fast, why would unemployment be at a six year high? Businesses would be hiring more people, to cope with increased demand. The answer is that those export-oriented businesses don’t expect their growth to continue.

The optimistic view is to point out that the economic growth projections are more recent, whereas the unemployment figures were from the previous year. Obviously, last year’s unemployment can’t be indicative of the current growth we’re experiencing, so duh to the naysayers. From this perspective, we have good reason to hope that unemployment will again fall, as businesses have shown signs of picking up.

Take your pick!


Featured image by Sean Chong.

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