Economics: Is Singapore's booming economy holed below the waterline?

Singapore's recently unstoppable Big E (earnings) figure came to an abrupt stop sometime in the last quarter of 2007 - and then went into rapid reverse.

But at the same time, the PPP factor (Prices, Pay, Property) continued to increase.

There are some explanations for this.

1) Singapore last year was concerned that Hong Kong property prices were rising rapidly and Singapore's were hardly moving. So they removed some of the restrictions on foreign ownership. This was one factor in a sudden and rapid rise in Singapore property prices. And with rentals in HDB blocks in marginal areas such as near the airport up 30% as against a year ago and landlords already telegraphing that they will be looking for at least 30% increase on renewals this year and next, the differential between ownership and rental is diminishing rapidly, despite moderate increases in interest rates.

2) Highly paid financial sector workers are flooding Singapore. Now 40% of Singaporeans work in the financial sector. But as Hong Kong's property prices have risen to ridiculous levels, and the pollution from China is not only encouraging people, especially those with children, to leave and discouraging new hires from accepting posts in HK, Singapore has benefited in the past three years.

3) Singapore is attracting property investment from Indonesia where many see it as a safe and stable environment in which to both park their wealth and - equally importantly in a country where kidnap for ransom is commonplace - somewhere that the precise extent of their wealth can be hidden from prying criminal enterprises.

4) Singapore has been going through a skills shortage in its financial and other parts of the service sector for the past three years. That has increased competition for local job holders and as a result salaries have risen significantly.

5) As property prices rise so, inevitably, so rents and the size of loans. That directly feeds into inflation at every stage of the production - delivery cycle. And that pushes up prices. But this increase is not linear - it is cumulative along the supply chain. Singapore makes almost nothing that Singaporeans need. The vast majority of its manufactured product (such as has not been transferred to low-wage economies) is exported. And almost everything its residents need either comes over the border in the convoys of trucks from Malaysia, or by container or by airfreight.

Increasingly, Singapore's wealth comes from the financial sector. It is hoping to redress that imbalance by the development of Sentosa Resort - the partially obscured truth of which is that it is hoping to grab at least a small slice of the Macau gambling market. That market is so big that Macau has overhauled Las Vegas as the largest casino centre on earth and that it houses the world's largest casino resort - The Venetian. Macau has had motor-racing in its streets for decades. Singapore will run F1 (which clearly outdoes Macau's glorious heritage in one weekend) later this year - and do it at night, which is unique in single seat, open wheel racing (partly because the cars have no lights and nowhere to put them even if they were to have them. The Venetian attracted 76,000 visitors on its opening night - and more than a million in its first 18 days of operation. That's on an island with a permanent population of less than half a million people, according to no less an authority than the USA's CIA. Singapore has a population nine times larger, according to the same source.

And, Singapore reasons, once people are on a plane, why do they care if they go to Macau or Sentosa?

But Sentosa is not yet bringing in the big returns. The casinos there are not due to open for at least a year, and although they are backed by big names Sands and Genting / Star they do not have the huge Chinese market on their doorstep.

But they do have the near 200 million people of the combined Malaysia / Indonesia markets, and both have very strict controls on very limited gambling allowed.

But while all of this seems rosy, the reality is that Singapore's economy contracted 5% in the last quarter of 2007. That's a huge problem. Whilst Singapore's government economy will not fall into a black hole - its broad spread of foreign investments in a wide range of industries will make sure of that - individuals are less insulated against a global slowdown, especially in financial services.

Singapore has just paid out its New Year bonuses - and they were not as much as many were hoping. Some Government Linked Companies (GLCs) are already talking to unions about restructuring pay and conditions.

The question is going to be whether Singapore's economy is artificially inflated by the sudden influx of foreign investment, and whether that will continue. Logically, at least part of it should - for Singapore's reputation for being a safe, clean place to bring up your kids is fully justified. But that brings its own problems - foreign money distorts property markets: that's why Singapore has for long had a policy of restricting foreign ownership so blocking inflation for the majority of Singaporeans who live fine comfortable lives in apartments that Hong Kongers would die for.

The problem now facing Singapore is the risk of the PPP v E gap generating a demand for substantial consumer credit generated by higher interest rates (although Singapore is already saying it plans to reduce this), over-stretched mortgage payments, inflation in shops and restaurants, and more. One Chinese habit that seems impossible to break is that of spending heavily into a recession. Traditionally Chinese communities buy cars, jewellery and other things as recession looms. That often masks the underlying problems.

For many, there is a simple question - is Singapore going to keep full employment.

For Singaporeans, there is little doubt that it will do its best. But for others, the future is less certain unless they are in highly skilled positions.