IMF flags structural drag behind low consumption share

Household spending has fallen 8 ppt since 1990 as structural factors weigh on demand.

Singapore's private consumption ratio is the lowest amongst a group of 31 advanced economies, with structural factors weighing on household spending, the International Monetary Fund (IMF) said.

Private consumption accounted for 38% of Singapore's gross national disposable income (GNDI) in 2024, down from 46% in 1990.

The IMF's analysis found that Singapore's low consumption-to-GNDI ratio is "primarily a structural phenomenon,” whilst cyclical factors have a smaller role.

"Structural, slow-moving" factors such as demographics, economic structure, and development levels are important drivers of differences in private consumption across advanced economies, the organisation said.

Singapore's labour share ranked amongst the lowest in the sample and was 10 percentage points (ppt) below the average for the other advanced economies in 2024, making it the second-most important factor behind the country's lower consumption rate relative to peers.

A one ppt increase in the share of labour compensation in national income is associated with a 0.44 ppt increase in the consumption-to-GNDI ratio, according to the IMF's preferred model.

“This is consistent with Yoo (2021) and highlights that economies with large corporate sectors and a large share of foreign-owned multinationals have a smaller portion of resources that accrue to domestic households,” the IMF said.

Singapore's high level of development also weighs on its consumption ratio. A one log unit increase in lagged real gross domestic product (GDP) per capita is associated with a 4.4 ppt lower consumption ratio in the preferred specification.

The city-state’s role as a financial centre is another factor, with a one log unit increase in the IMF's financial-centre intensity measure being associated with about a 1.9 ppt lower consumption ratio.

The IMF said Singapore's lower old-age dependency ratio, lower labour share, higher real GDP per capita, financial-centre status, and lower household credit-to-GDP ratio all weigh on Singapore's consumption relative to other advanced economies.

Demographics also affect consumption patterns. A one ppt increase in the old-age dependency ratio is associated with a 0.41 ppt increase in the consumption ratio, as older populations tend to dissave and consume more.

Singapore's old-age dependency ratio, however, remains lower than the average for other advanced economies despite its ageing population.

Cyclical factors have a smaller effect. A one ppt increase in real GDP growth is associated with a 0.15 ppt decline in the consumption ratio, whilst a one ppt increase in household credit-to-GDP is associated with a 0.04 ppt increase.

“A one ppt increase in the real short-term deposit rate is significantly associated with a 0.17 ppt lower consumption ratio; a higher real return on deposits strengthens incentives to save and defer consumption and may also be related to the composition of households’ balance sheets,” the IMF said.

The IMF also said Singapore's defined-contribution pension system may explain up to 1.6% of GDP of its current account surplus.

However, its pension measure does not capture differences in mandatory contribution rates, fund generosity, and consumption smoothing under defined-contribution schemes.

The IMF's analysis found that the decline in the city-state's consumption ratio since 2002 was associated with a higher level of development, falling labour share, and growing prominence as a financial hub, alongside global shocks captured by year effects.

The increase in the old-age dependency ratio has offset part of the decline, the organisation noted.

The analysis covered 31 advanced economies from 1990 to 2024 and used two-way fixed-effects regressions.

The IMF cautioned that the results identify partial correlations rather than general equilibrium causal effects and that some coefficients may reflect factors not captured by the analysis.

It said the structural nature of the drivers of private consumption points to the role of medium-term structural policies in reducing Singapore's external surpluses over the medium and long term.