THE Monetary Authority of Singapore’s (MAS) data released yesterday sprung two surprises.
First, the Singapore economy grew by 9.4 per cent year-onyear in the third quarter, with all sectors putting in a strong performance. The manufacturing sector picked up speed in time for the Christmas holiday season.
In addition, second quarter GDP growth was also revised up 0.1 percentage point to 8.7 per cent year-on-year due to higher construction growth (18.8 per cent versus 17.6 per cent initially estimated).
Even the MAS noted that the “Singapore economy has performed better than expected thus far in 2007”, notably the “non-IT industries and asset market-related activities” such as property, financial advisory and capital markets”.
This is good news for the man on the street as GDP growth is “on track to come in at the upper end of the 7 to 8 per cent forecast range this year”.
In fact, our forecast for full year growth has been revised up from 7.9 to 8.2 per cent taking into consideration the 9.4 per cent flash estimate, suggesting that there is potential to exceed the Government’s forecast.
Despite the weaker growth prospects for the US economy, the non-IT manufacturing, construction and business services, which are more dependent on regional and domestic sources of demand as well as developments in specific product markets, have proved remarkably resilient for the Singapore economy.
Biomedical manufacturing and transport engineering clusters should continue to outperform electronics, albeit even the latter is showing signs of improvement in the third quarter.
On the services side, financial and tourism-related industries should continue to do well, riding on the ongoing property boom and two integrated resorts projects.
Barring any further sub-primerelated surprises, 2008 growth is also likely to surprise on the upside too. Our forecast is 6.5 per cent — above the Government’s official growth forecast of 4 to 6 per cent.
The second surprise, however, caught financial market players somewhat off-guard. MAS indicated that it “will increase slightly the slope of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band” to cap inflationary pressure and ensure price stability over the medium term while keeping the gradual and modest appreciation of the S$NEER.
This “slight” slope steepening in the S$NEER is an unprecedented move by the MAS and suggests a greater concern towards inflationary pressures in the medium term on the back of a fairly sanguine and robust growth outlook.
Higher inflation is here to stay and this will impact the pocket of the average person. Headline consumer prices are likely to cross 3 per cent in the remaining months of this year and run as high as 3.5 per cent year-on-year in the first half of 2008 due to the GST hike and base effects of lower energy and car prices in the first half of 2007, before easing in the second half to achieve 2 to 3 per cent for full-year 2008.
While the 2 percentage-point GST increase in July explains part of the accelerating inflation, other factors are also at play — higher global oil and food prices, a tight labour market and rising property prices will continue to pressure the Consumer Price Index higher. The cycle of rising wages and domestic consumption imply that domestic demand drivers will increase in importance.
Our initial take is that the slope steepening, as opposed to the other alternative of re-centreing the band higher at pre-announcement levels, represents a more hawkish policy signal.
Over the medium term, this suggests greater latitude for the S$NEER appreciation if the need so arises compared to a band recentreing.
Given that inflation is expected to clock an average of 2.2 per cent for 2007 and 2008 (based on inflation of 1.9 per cent this year and 2.5 per cent next year), we can impute a 3 per cent appreciation bias for our S$NEER, from 2 per cent previously.
We expect the USD-SGD to trade lower towards 1.4250 (central tendency) in 12 months while in the nearer term, the pair is likely to end the year at 1.4500. This means cheaper holidays and shopping in the United States, but be prepared to fork out more for domestic goods and services.
Ms Selena Ling is a Treasury Economist at OCBC Bank.
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