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.