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US: Vibrant Pace . Europe: Mixed
Box 15 – Debunking the Deflation Myth in Singapore . International Financial Markets: Broad Recovery Amid Uncertainty
Box 16 – Exchange Rate and Macroeconomic Volatility . Monetary Policy in an Increasingly Volatile Environment
Recent Policy Research and Analysis Against the Backdrop of More Frequent Shocks . Box 17 – Creating an Electronics Leading Index
Singapore: Riding the Global Recovery
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.
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.
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%.
Enhancing Risk-focused Supervisory Approach
Box 1 – Fostering a Sound and Progressive Financial Services Sector
Enhancing MAS’ Supervisory Capabilities
Box 2 – Stress Testing of Life Insurers
Box 3 – Streamlining Inspection Function
Thematic Inspections to Improve Surveillance