The World Economy: Robust Growth on  
the Strenght of the US Economy  
International Financial Markets: Resilience  
in the Face of Uncertainties
Singapore Financial System
Remains Sound  
Singapore Economy: Ending on a High Note  
Monetary Policy Amid Continued Growth  
and Emerging Inflationary Pressures  
Strengthening the Monetary Policy
Formulation Process  
Pushing the Frontier of Monetary Policy
Research and Analysis  
Box 16 – Assessing Market Response to  
MAS’ Monetary Policy  

The Singapore economy grew by a robust 6.4% in 2005, exceeding earlier growth forecasts. Gross Domestic Product (GDP) growth was supported by firm external demand, reflecting the resilience in the global economy, IT sector and financial markets. The growth momentum was particularly strong in the latter half of the year, notching up strong sequential annualised growth of 9.6% and 13% in the final two quarters of the year, respectively (See Chart 8).

The economic expansion in 2005 was largely supported by the manufacturing and trade-related sectors. The financial services sector also put in a good showing, growing apace with GDP, at 6.5%. Financial advisory and other emerging services, including healthcare and education services, have provided the additional fillip to growth. These emerging services were identified by the Economic Review Committee in 2002 as the “additional cylinders for the services engine”.

Alongside the broad-based economic expansion, the labour market saw spectacular improvement, with total job creation last year amounting to a record 113,300. This is the strongest employment growth since the peak of 120,300 in 1997. Job creation was broad-based across the manufacturing and services sectors, with construction employment notably turning around after fours years of contraction. In tandem with the strong employment growth, the unemployment rate fell to a four-year low of 2.6% in December 2005.

In the early months of 2006, some signs of easing in the domestic economy emerged with growth momentum slowing to 6.8% in Q1. However, this is not indicative of a broad-based slowdown, but rather a retraction to a more sustainable pace of growth. Indeed, the continued growth in the global economy and further expansion in the global IT industry should provide support for the domestic economy to grow in line with potential this year. Activity in the manufacturing sector is expected to be sustained at high levels, led by steady, albeit modest growth in the electronics sector. In addition, trade-related services should strengthen further alongside sustained growth momentum in the region. The domestic-oriented sectors, such as retail sales and business services, should also see further improvement, given the favourable outlook for the labour market and the uptrend in tourism inflows. Barring any shocks, Singapore’s GDP growth is expected to come in at 5-7% in 2006.

Consumer price inflation came in at a mild 0.5% for 2005, after averaging 1.7% in 2004. The low headline inflation rate masked a somewhat faster pace of price increases across a number of major categories of the Consumer Price Index (CPI) basket.
A significant decline in car prices (subsumed under “transport & communications”) last year dampened overall inflation by about 0.7% points (See Chart 9). Indeed, abstracting from the influence of car prices, the MAS underlying inflation measure (which excludes accommodation and private road transport costs) came in above the headline rate, at 1.3% during the year.

Although the headline CPI inflation and the MAS underlying inflation measures picked up in the first four months of 2006, this reflected low “base effects” arising from energy-related items which experienced a sharp acceleration in the second half of 2005 as petrol discounts were gradually rolled back and electricity tariffs raised. Headline inflation is expected to moderate into the second half of 2006, as some of the base effects dissipate. Overall, domestic inflationary pressures are likely to remain well-contained, as the economy largely expands along its potential path. For 2006 as a whole, the headline CPI inflation is projected to come in at 1-2% before moderating somewhat in 2007.

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