MAS says financial services, IT sector vulnerable but core activities insulated from US
Global headwinds have gathered speed in recent months, but domestic and regional support should prevent the Singapore economy from sliding into a sharp downturn in 2008, says the Monetary Authority of Singapore (MAS).
While it still expects Singapore's GDP growth to come in at around 4-6 per cent this year, 'barring a sharp downturn in the US economy', the central bank says the economic outlook in 2008 will vary significantly from industry to industry, with certain sectors more vulnerable to the US downturn.
And in the event of a protracted US recession, along with a widespread decline in global and regional economic activity, Singapore's growth will be more severely hit, as even the more resilient activities will not go unscathed, MAS warns in its latest Macroeconomic Review. In any case, even in the baseline scenario, Singapore's growth momentum is expected to ease from its double-digit sequential pace in Q1 over the next few quarters.
Advance estimates based only on January and February data have the Singapore economy growing almost 17 per cent in Q1 over the preceding Q4 2007. In year-on-year terms, the flash Q1 GDP growth was a robust 7.2 per cent.
The slowdown this year, after four years of above-7 per cent growth, will bring the economy closer to its potential output path, with the output gap narrowing markedly by 2009, MAS says. The economy has racked up a positive output gap, having expanded above its 4-6 per cent medium-term trend potential over the last four years.
MAS remains broadly optimistic about Singapore's growth outlook, as a good 30 per cent of the economy - core activities such as construction, marine transport and pharmaceuticals - are relatively insulated from the US.
Another big core of activities, accounting for some 37 per cent of GDP, enjoy strong domestic and regional support. But even these sectors - transport hub services, tourism-related activities, business services - would be affected if the US downturn deals Asia a tough hand.
But the most vulnerable to a US and global downturn are 'sentiment-sensitive' financial services such as the wealth advisory, equities, brokerage and treasury markets, as well as the IT-related cluster. They account for about one-third of the economy.
And while the growth outlook is a little murky, inflation remains the bigger concern, with further upside risks to global oil and food prices. MAS expects inflation in Singapore to stay high in 2008 'due to a confluence of external and domestic factors'.
Consumer price inflation could average above 6 per cent in the first half of 2008, and ease to about 4 per cent in the second half, partly as the GST hike effect wears off, it estimates.
'On a sequential basis, inflation should moderate over the rest of the year and come closer to its historical average rate of increase of 0.3 per cent,' it adds. MAS expects the 2008 inflation rate in the upper half of the 4.5-5.5 per cent forecast range, with underlying inflation - minus private accommodation and private road transport - coming in at 3.5-4.5 per cent.
The central bank also reiterates that its latest monetary policy decision to re-centre the policy band will help to ease inflation pressures and provide support to the economy as it slows to a more sustainable growth pace.
The half-yearly Macroeconomic Review also cites empirical evidence of first signs of a 'weak synchronicity' in economic activity between the US and Asia - as opposed to a full decoupling.
Latest trade data, it says, suggest there is some short-term substitution as regional exporters seek out opportunities in the growing China and Middle East markets to partially offset the drag in US demand.
One economist who was a little surprised by the MAS' latest assessments is HSBC Bank's Robert Prior-Wandesforde - he reckons the central bank is a bit hopeful about the inflation forecast for the year. He thought the 4.5-5.5 per cent inflation forecast range should have been revised up, and that the economy would quite easily hit the top end of the 4-6 per cent GDP growth forecast.
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