Singapore Economy Is Showing Signs Of Overheating: HSBC

Source : The Business Times, October 6, 2007

SINGAPORE'S economy risks overheating as home prices reach the highest in a decade, companies hire workers at an unprecedented pace and the stock market soars to record levels, economists say.

Inflation at a 12-year high and an economy expanding 'a little too rapidly' mean signs of overheating are 'a few too many for comfort', Robert Prior- Wandesforde, an economist at HSBC Holdings plc in Singapore, said in an Oct 3 report.

'Consumer prices are by no means the only thing running relatively hot in the economy at present,' he said. 'A buoyant labour market was accompanied by strong wage growth. The Straits Times Index has also risen nearly 50 per cent over the last year.' Singapore's economy grew an annualised 14.4 per cent in the second quarter, the fastest pace in two years, fuelled by construction and financial services. Employers added a record number of workers in the same period, pushing the jobless rate to a six-year low as service companies increased hiring.

'The overheating problem in India and China has now spilled over to Singapore,' Deyi Tan, an economist at Morgan Stanley in Singapore, wrote in an Oct 3 report. 'Not only has persistently strong growth resulted in an office space crunch, labour supply needs have also led to a jump in the foreign population. Residential property is booming and expat schools are oversubscribed.' Office rents in the central business district are at record highs as financial institutions, lured to the city-state by corporate tax cuts, expand their businesses.

Singapore's private residential prices rose 8 per cent to a 10-year high in the third quarter, the government said on Oct 1. Home prices have increased every quarter in the past three-and-a-half years, according to data from the Urban Redevelopment Authority.

Singapore's consumer price index increased 2.9 per cent in August from a year earlier, in part after an increase in the Goods and Services Tax the month before.

The Monetary Authority of Singapore expects inflation in 2007 to be between one per cent and 2 per cent, it said on Aug 27, up from a previous range of 0.5 per cent to 1.5 per cent. Consumer prices may rise as much as 2 per cent next year. The island's longest economic expansion since 1991 and the prospect of higher salaries are prompting more Singaporeans to enter the labour force. Average monthly wages climbed 8.5 per cent in the second quarter, the fastest since 2000.

Income gains are fuelling consumer spending at restaurants and department stores, and may help the economy achieve the government's forecast of as much as 8 per cent growth this year.

Singapore's US$134 billion economy may expand 8.5 per cent this year, and grow 7.3 per cent in 2008, HSBC predicted. 'If forecasts are right and the country can look forward to another 12 months of above-trend expansion, then there will be less and less spare capacity in the economy and hence more and more signs of overheating,' Mr Prior-Wandesforde said. -- Bloomberg