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Services sector playing increasing role in Singapore's economy

The increasing pace of activity in the services sector of the Singapore economy is expected to continue into 2014, according to the latest Monetary Authority of Singapore's Macroeconomic Review.

SINGAPORE: The services sector is expected to continue expanding in 2014, according to the latest half-yearly Macroeconomic Review by the Monetary Authority of Singapore (MAS).

Activity in this sector has been growing over the past decade, with services accounting for over two-thirds of total output last year.

Singapore's services sector is playing an increasing role in the economy.

According to the Review, external-oriented industries - led by services - contributed to half of last year's GDP growth.

Daniel Wilson, Asia-Pacific economist at ANZ Bank said: "We've seen Singapore's growth rebound on the external sector many times before. What's unique is that it's coming from the services industry, particularly trade-related services and financial services.

"Those two industries contributed more than double what would have normally in the 2000s. At the same time, manufacturing's contribution to growth fell back to about 20 per cent."

MAS adds that the smaller contribution from the domestic manufacturing sector was atypical. It says that in the 2000s, the domestic manufacturing sector contributed around a third to growth in the external-oriented industries.

The services sector accounts for over two-thirds of Singapore output in 2013. Now, the bulk of that is what the MAS calls 'modern services' which refer to financial, telecommunications, and other business services.

Economists say this trend reflects Singapore's ongoing transition."

This transition also includes a shift towards a more services-based manufacturing sector.

For example, IT firms are moving away from manufacturing hardware, to services-related activities, like Big Data and other types of analytics.

Based on the Review, MAS says "a breakdown of global revenues by the largest electronics firms in Singapore reveals that the share of total revenues accounted for by services-related activities rose from 48 per cent in 2007 to 55 per cent in 2013.

This is why although services are growing in importance, economists say manufacturing will remain a key growth driver for Singapore.

However, they say there will be winners and losers from this round of economic restructuring.

Selena Ling, head of Treasury Research and Strategy at OCBC Bank, said: "Those that are facing declining profit margins, experiencing rising business costs, and are not able to pass on the rising business costs to end-consumers, because of competition - I think these are the companies that will be some of the unintended victims of the economic restructuring."

Looking ahead, despite an expected improvement in external conditions, MAS expects the Singapore economy to grow by 2 to 4 per cent this year.

It notes that higher labour costs and tighter profit margins could continue to weigh on growth.

Meanwhile, headline inflation is forecast to come in at 1.5 to 2.5 per cent, and core inflation at 2 to 3 per cent.

MAS adds that the appreciating stance of its exchange rate policy will help to moderate inflationary pressures and anchor inflation expectations.

The Marcroeconomic Review provides the central bank's assessment of Singapore's economy, which forms the basis for its policy decisions.

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