Singapore economy to grow 5.1% in 2012

Facing global weakening

GDP growth slowed significantly in the second quarter of 2011 to 0.9% y-o-y (after 9.3% in 1Q11). Private consumption held up, supported by favourable labour market conditions, and government consumption and investments bounced back. However, export growth slowed significantly, partly due to the supply-chain disruptions associated with the natural disaster in Japan. On the supply side, manufacturing drove the sequential drop, led by biomedical and electronics which were most affected by global economic conditions. Services growth also slowed during the quarter.

Growth is expected to ease in the coming quarters. While retail sales are holding up, the weakening global economic conditions are spilling over to Singapore’s economy, hurting exports, industrial production, and trade-related services. While private consumption growth is expected to hold up reasonably well, supported by good job and wage prospects, Singapore’s high-beta economy should see exports and inventories take a hit. This has led us to lower our growth forecasts significantly to 5% in 2011 (from 6.2%) and 5.1% in 2012 (from 6.3%).

Inflation has been on the rise. This was initially due to rising accommodation costs and politically engineered increases in car prices. However, inflation has now become more broad-based as capacity is tight and demand-led price pressure has built up. Inflation is likely to remain elevated for a while, even though growth is easing, given that the economy is operating above its long-term potential.

Given the lingering inflation pressures, we expect the MAS will maintain the tightening bias in October. However, with growth set to ease over the policy horizon, the MAS may feel compelled to lessen the slope of the NEER band. Fiscal policy could turn out to be tighter than planned given the conservative assumptions underlying the 2011/12 budget, although these assumptions now look less conservative than previously given the slower growth now expected.