CONTENTS
HOME
OUR WORK - Managing Risks, Sustaining Growth
A MORE CHALLENGING POLICY ENVIRONMENT
MONETARY POLICY - PROVIDING AN ANCHOR FOR PRICE STABILITY OVER THE MEDIUM-TERM
MANAGING THE CHALLENGES OF INCREASED GLOBAL FINANCIAL UNCERTAINTY
A SOUND AND PROGRESSIVE FINANCIAL CENTRE
CURRENCY
 
A MORE CHALLENGING POLICY ENVIRONMENT 12
 
Slowing in the G3 Economies 12
 
Asia Remains Resilient 13
 
Inflation Is On The Rise Globally 13
 
Singapore Is Not Immune To Global Growth and Inflation Risks 14
 

Singapore Is Not Immune To Global Growth And Inflation Risks

Notwithstanding Asia's resilience, world GDP growth is expected to slow from the 5% pace recorded in 2007, led by the downturn in the US. At the same time, headline inflation in the industrial and developing economies is poised to climb further.

Being highly open, the Singapore economy will be impacted by these global trends. Indeed, Singapore's GDP growth slowed to an average of 4.9% quarter-on-quarter seasonally adjusted annualised rate (q-o-q saar) over the period Q4 2007 to Q1 2008, down from 9.3% over the preceding two quarters. This was largely due to a softening in asset market-related activities, after a sharp run-up in the earlier part of 2007. Some signs of slower growth have also become evident in the broader economy, although continued strong investment spending and a buoyant labour market have helped to shore up domestic fixed capital formation and consumption expenditure, respectively.

CPI inflation rose to 2.1% in 2007 compared to 1% in 2006 before reaching 6.6% in Q1 2008. Nearly half of the increase in consumer prices in Q1 2008 can be attributed to the escalation in global oil and food prices. Domestically, business costs have risen on account of higher wages and rentals following tighter conditions in the labour and commercial property markets. Higher accommodation costs, largely due to the revision in the Annual Values of HDB flats, and the 2 percentage point hike in the Goods and Services Tax in July 2007, also contributed to the jump in CPI inflation in Q1 2008.

Looking ahead, the Singapore economy will continue to moderate while inflationary pressures remain. Nevertheless, GDP growth is forecast to come in at the medium term potential of around 4% to 6% in 2008. While there remain considerable downside risks to external demand, the economy is likely to be supported in the near term by continued growth in a number of industries that are relatively resilient to a global slowdown. These include construction, financial intermediation and marine and offshore engineering, which are largely driven by industry-specific factors and are, therefore, insulated to some degree from external conditions over the short-term.

Other industries, which are more dependent on regional and domestic fundamentals, will still be at risk from a protracted US downturn with concomitant spillover effects on the Asian region. These include transport-hub and tourism-related services. The most vulnerable industries include sentiment-sensitive segments in financial services, such as equities and wealth management, and IT-related industries which are more dependent on exports to the major markets.

While the moderation in GDP growth may be expected to take the edge off some inflationary pressures (for instance, wage and rental increases), overall inflation risks are likely to remain on the upside. On the home front, labour market conditions will continue to be tight. Global oil and food prices are projected to remain elevated and these external sources are expected to be the most important contributor to headline CPI inflation in Singapore in the second half of this year.