Economic Developments and Monetary Policy


The Singapore economy expanded by a robust 8.4% in 2004, the highest growth rate recorded since 2000. Supported by the upturn in the global IT industry and generally buoyant conditions in the OECD and East Asian economies, the Singapore economy grew strongly in the first half of 2004, following the rebound from SARS in the second half of 2003. Activity increased across most sectors of the domestic economy.

Not surprisingly, such a rapid pace of expansion was difficult to sustain. The growth momentum slowed down in the second half of 2004, as the downturn in the global IT industry spilled over to the domestic manufacturing and trade-related services. Nevertheless, economic activity remained at a high level, and provided the basis for the strong increase in employment last year.

Total job gains in 2004 came in at a strong 71,400, more than making up for the 35,900 jobs lost over the preceding three years. New job creation was fairly broad-based across the manufacturing and services sectors, as well as amongst both local and foreign workers. The significant rebound in employment brought the headline unemployment rate down to 3.7% at the end of the year, from an average of 4.7% in 2003.

Moving into 2005, the economy contracted by 5.5% on a quarter-on-quarter seasonally adjusted annualised basis in the first quarter (See Chart 21). This largely reflected the fluctuations in the output of the biomedical sector and is not expected to have significant spillover effects on the broader economy or on overall employment conditions. Excluding this sector, the economy saw continued growth. In particular, electronics output showed early signs of a turnaround after the peak in the third quarter of 2004, while growth in the services sector was supported by the financial and business segments.

Looking ahead, the pace of economic activity is set to slow in 2005. On the external front, leading indicators point towards more moderate growth of the global economy this year, compared to the exceptional performance in 2004. The global IT industry will also see modest growth in 2005. Nevertheless, this downturn is likely to be less severe and shorter in duration compared to the downswing in 2001, given the greater vigilance in inventory management. Against this backdrop, the Singapore economy is poised to descend from its cyclical high in 2004, and is expected to grow between 2.5% and 4.5% in 2005. Notwithstanding the slower pace of growth, the economy will remain close to its potential output path, which will support further, though more modest, improvement in the labour market.

Consumer price inflation picked up pace, after remaining fairly subdued over most of 2003. For 2004 as a whole, consumer price inflation averaged 1.7%, largely as a result of commodity-related shocks. In particular, higher oil prices have had a direct impact on consumer prices as producers passed on some of the price increases. This was, however, mitigated by highly competitive conditions in certain sectors such as the petrol retailing industry. Apart from oil, food-related shocks were another source of inflationary pressure, with the bird flu outbreak in the region leading to reduced supply and an upward spike in poultry product prices.

In addition, domestic factors – such as the increases in costs and charges of certain services, which had been put off due to the economic slowdown in 2001 to 2003 - also contributed to the upward pressure on consumer prices last year.

This year, inflation decelerated markedly in the first quarter, partly reflecting the effects of the latest revision to the weights and composition of the Consumer Price Index (CPI) basket. For 2005 as a whole, headline CPI inflation is now expected to come in at 0% to 1%, before rising to 1% to 2% in 2006.  Inflationary pressures are expected from a variety of sources, including higher commodity prices, wage increases and hikes in some services charges.  Domestic unit labour costs are also expected to turn positive after declining last year, reflecting the moderation of cyclical productivity gains and continued improvement in the labour market.