Business Times: Thu, Jul 26
[SINGAPORE] If global conditions deteriorate significantly, Singapore could be hit with a double whammy of growth slipping below 1 per cent coupled with high inflation as costs remain elevated, said the Monetary Authority of Singapore (MAS).
Housing and private transport costs are likely to remain high and the MAS said it is narrowing the forecast range for inflation to 4-4.5 per cent in 2012 from 3.5-4.5 per cent previously. Core inflation remains unchanged at 2.5-3 per cent.
In a sober assessment of Singapore's prospects in the second half of the year, MAS managing director Ravi Menon yesterday said the current 1-3 per cent growth target for 2012 remains on track based on three assumptions: "No recession in US, no significant escalation of eurozone crisis, and no hard landing in China.
"If one or more of these assumptions do not pan out, Singapore's GDP growth could dip below 1 per cent this year," said Mr Menon at MAS' annual report review. MAS does not expect a hard landing in China, he added.
Singapore's gross domestic product (GDP) averaged 4.2 per cent in the first half but growth momentum is clearly slowing, he said. The economy shrank unexpectedly in the second quarter, igniting talk of a looming technical recession in the third quarter.
Advance estimates from the Ministry of Trade and Industry (MTI) showed GDP shrinking 1.1 per cent in Q2 from the previous quarter on a seasonally adjusted annualised basis, as manufacturing faltered. This was a sharp reversal from Q1's 9.4 per cent expansion, which MTI lowered from the previously announced 10 per cent.
The global economy is slipping into a synchronised slowdown, Mr Menon said.
Meanwhile, inflation remains stubborn. MAS narrowed the consumer price index or CPI-All items inflation to 4-4.5 per cent but left unchanged core inflation and expects it to fall to 2 per cent by year-end.
"The figure we watch most closely is core inflation, which excludes the costs of accommodation and private road transport," said Mr Menon.
CPI rose 5.3 per cent in June from a year ago. This came after inflation had slowed to 5 per cent in May from April's 5.4 per cent.
But core inflation held steady at 2.7 per cent for a third straight month.
"We were concerned when core inflation came in at 3.1 per cent in Q1 this year," he said.
In Q2, core inflation moderated to 2.7 per cent and is likely to ease further to 2 per cent by year-end as global oil prices and food prices have fallen, he said.
As for local wages, Mr Menon said 2011's 6 per cent increase in domestic wages passed through quite strongly into a variety of services costs earlier this year. But unlike core inflation, CPI-All items inflation will remain elevated as imputed rentals are expected to remain high from a year ago, he said.
This essentially does not involve an actual increase in spending by households as only a small segment of the population rents their homes, he added.
"We expect continued tightness in the housing rental market, especially in the HDB segment. While measures have been taken to increase housing supply, it will take time for this supply to come onstream," said Mr Menon.
Car prices will also remain high as COE premiums are likely to stay high.
MAS also said its monetary policy has had a restraining effect on inflation and its current policy stance remains appropriate. For instance, since April 2010, global oil prices have risen by an average of 15 per cent year on year, but domestic petrol pump prices have only increased by 8 per cent, MAS said.
The stronger Singapore dollar also restrained the export industries and helped to dampen business cost pressures.
"The persistence in headline inflation has led to some questions about the efficacy of Singapore's exchange rate-centred monetary policy framework.
"MAS has studied this issue very carefully. We are assured that monetary policy framework remains effective and the current policy stance remains appropriate," said Mr Menon.
Monetary policy has been tight for more than two years now. In April this year, MAS increased the slope of the policy band further, increasing the foreign exchange rate.
Since April 2010, the trade-weighted Singapore dollar has risen by 3.3 per cent per year. If the exchange rate had been stable, inflation this year would have been 6.5-7 per cent, rather than the 4-4.5 per cent MAS is projecting, he said.
The next Monetary Policy Statement will be released as scheduled in mid-October.
Economists said MAS is managing expectations should a global recession happen. They also said should the worst case scenario happen, MAS is preparing the market for monetary policy easing.
"They're inferring a worst case scenario or a global recession scenario, it's just talk, more to moderate expectations and (flag) higher risks to the economy," said Irvin Seah, DBS economist.
Tackling high inflation is difficult as it is mainly driven by domestic pressures and policy adjustments, he said.
Although the government says the high imputed rents have little effect on most Singaporeans, Mr Seah noted that if property prices continue to rise, the mortgage burdens will increase. "It will bite into expenditure and exacerbate the cost of living," he said.
United Overseas Bank economist Alvin Liew thinks the MAS will stay the course on monetary policy if inflation stays elevated. "Only if we get a sharp external shock will we see MAS loosening policy," he said.
Chua Hak Bin, Bank of America Merrill Lynch economist said falling commodity prices and slowing global growth will ease some of the current inflation concerns. "We expect MAS to normalize and ease to a 'modest and gradual' appreciation at the October meeting, from the current 'slightly steeper' stance," he said.
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