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ECONOMIC DEVELOPMENTS
AND MONETARY POLICY |
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| Singapore: Riding the Global
Recovery |
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| The year 2003 was an eventful one
for the Singapore economy which expanded by 1.1% (See Chart
24). In the first quarter of the year, the economy plodded along
against the backdrop of heightened uncertainties in the external
environment. Concerns over the impending US-Iraq war weighed
down on economic growth, especially the externaldriven trade-related
sectors. |
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However, even before the war was
over, the economy was hit by an unprecedented shock in the second
quarter – SARS – which took a heavy toll on the domestic
economy. SARS had an uneven impact on various sectors of the
economy. A fourtiered framework to assess the impact on the
respective sectors (See Chart 25) showed that the tourism and
travel-related or Tier 1 industries were most severely hit.
The negative impact of SARS was compounded by weakness in the
manufacturing and trade-related services sectors, on the back
of lacklustre demand in the global IT market. As a result, GDP
growth contracted sharply by 7% on a seasonally adjusted annualised
basis during the quarter.
Alongside the rapid containment of SARS and the synchronised
upturn in the global economy, domestic economic activity rebounded
strongly in the third and fourth quarter of 2003. The Singapore
economy appeared to have finally turned the corner in the second
half of last year. For the year as a whole, the economy registered
a modest 1.1% growth.
Similarly in the labour market, SARS took a severe toll on employment.
However, the strong cyclical recovery towards the end of 2003
coupled with the post-SARS rehiring, led to improved performance
towards the fourth quarter. The seasonally adjusted unemployment
rate fell from 5.5% in September 2003 to 4.5% in December 2003.
This reduction in the unemployment rate reflected a better-than-expected
pickup in the job market due to the sustained growth momentum
in the services and manufacturing sectors. |
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Moving into 2004, latest indications
suggest that the growth momentum has remained strong in the
early part of this year, as the external environment continued
to improve. More notably, the strong expansion in the first
quarter of 2004 was broad-based across sectors. However, the
recovery momentum could settle at a more moderate and sustainable
pace in the quarters ahead, following three consecutive quarters
of double-digit sequential growth since the third quarter of
2003. In addition, there are still some residual uncertainties
as we move into the second half of the year. These include the
sustainability of the strength of the US economy and global
IT demand.
The recovery in the domestic economy is expected to filter down
to the labour market, with the services sector expected to be
the main engine of employment growth. Nevertheless, job growth
may not be as strong as compared to previous upturns, given
ongoing structural developments such as the global trend of
outsourcing and offshoring. For 2004, the headline nominal wage
growth is expected to come in within the 2-4% range, following
a 1.7% growth in 2003, while the unemployment rate is projected
to moderate to 4% by year-end.
Consumer Price Index (CPI) inflation averaged 0.5% for 2003,
up from the marginal 0.4% contraction in 2002 (See Chart 26).
The rise was driven by several cost-push factors, arising from
both external and domestic sources. In particular, there were
some commodity-related price pressures, as higher inflation
of these commodity imports filtered into domestic consumer prices.
A two-stage pass-through framework was used to analyse how external
prices feed into domestic consumer prices. From our analysis,
the rise in global oil prices over much of 2003 filtered through
to domestic petrol prices and electricity tariffs. However,
the increases in the former were moderated by domestic competition
at the second stage, with an extended petrol price war among
pump operators. Prices of food commodities generally trended
up as well, reflecting some supply-side constraints as well
as rising demand alongside the global economic recovery.
On the domestic front, price increases of some consumer services
continued to keep apace, while hikes in the Goods and Services
Tax and some other administrative charges such as tobacco excise
duties also contributed to the higher inflation. Nevertheless,
overall CPI inflation was somewhat dampened by the general weakness
in domestic demand conditions, as the uncertainties over the
economic outlook due to the Iraq war and SARS took a toll on
consumer confidence.
In early 2004, the recovery momentum in the domestic economy
has improved consumer confidence and led to a turnaround in
prices of some consumer items. For the rest of the year, consumer
prices are expected to see a firmer recovery path. Several sentiment
sensitive items are likely to see stronger increases, even as
commodity-related price pressures continue to exert upward pressure
on overall consumer prices. For 2004 as a whole, headline CPI
inflation is expected to come in between 1.5-2%. |
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Enhancing Risk-focused Supervisory Approach
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Box 1 – Fostering a Sound and Progressive
Financial Services Sector
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Enhancing MAS’ Supervisory Capabilities
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Box 2 – Stress Testing of Life
Insurers
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Box 3 – Streamlining Inspection
Function
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Thematic Inspections to Improve Surveillance
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