Economy May Take Breather In 2008 With 4-6% Growth

Source : The Business Times, October 31, 2007

Oil prices and financial volatility are concerns but other drivers of growth still intact, says MAS

After four years of robust above-trend growth, Singapore faces a rather 'more uncertain' outlook next year, says the Monetary Authority of Singapore (MAS), citing high oil prices and the chances of further bouts of financial volatility.

And as investors turn cautious amid lingering uncertainties over the US sub-prime crisis, Singapore's property, wealth advisory and capital markets - the activities that saw much euphoria and froth in growth this year - will likely slow down in 2008. But other domestic sectors should still see healthy growth, and the economy, overall, revert to its medium-term trend potential of 4-6 per cent, MAS says.

MAS' Macroeconomic Review - http://tinyurl.com/29mnhx

This year, with the economy having grown 8.2 per cent in the first nine months after a blistering first half, Singapore's GDP growth is on track to reach the upper end of the official 7-8 per cent forecast.

While there has been some slowdown in the growth momentum - as reflected in the third-quarter 6.4 per cent sequential GDP growth pace - financial markets have rebounded recently and underlying economic conditions remain supportive, says the central bank in its latest half-yearly Macroeconomic Review.

Barring a major fallout from the sub-prime mortgage crisis, domestic asset market-related activities, especially financial services, 'should see some tentative improvement' in Q4, it says. In all, these asset market-related activities - key financial services and property-related transactions that saw quite some exuberance this year - accounted for 28 per cent of GDP growth in the first half.

But equity trading activity in 2008 is 'generally not expected to match the highs registered this year', and the domestic debt market could also see businesses adopt a wait-and-see approach amid lingering concerns over the credit market, MAS reckons. Market uncertainties could also dampen demand for wealth management services in 2008.

But the economy's other growth drivers, notably non-electronics manufacturing, will be largely intact and set for further expansion next year.

Even prospects for the construction sector are 'decidedly more sanguine', as many of the projects started this year move into the higher-value stages, where the biggest payment streams kick in.

And the IT-related cluster - the only growth laggard earlier this year - should also see modest growth in the near term, according to the MAS in- house electronics manufacturers' index.

An MAS study also finds 'little evidence' of any structural US-Asia decoupling, where analysts argue that East Asia's growth cycle is now less subject to the vagaries of US growth.

According to MAS, the US and Asia 'remain firmly coupled in the long run', but are seeing weaker links in the short run due to several factors. These include the modest nature of the US slowdown so far, and the fact that domestic demand in Asia has buffered the region's growth.

'In the event of a severe recession in the US, however, it is unlikely that Asian exports and growth will be unaffected,' the MAS report says.

But a temporary slowdown in the US, if confined to the housing sector with little impact on the American consumer, should not derail Singapore's growth prospects.

And if the US economy fares better than expected, the second half of 2008 could surprise on the upside - in which case, Singapore's asset market-related activities could 'bounce back swiftly and strongly', MAS says.