Singapore’s economy faces subdued growth, but inflationary pressures should stay low: MAS

Singapore’s economy can expect a “generally subdued growth environment” but this should keep inflationary pressures modest in the near-term, says the Monetary Authority of Singapore (MAS) in its bi-annual macroeconomic review released on Tuesday.

“The external environment will continue to exert a drag on Singapore’s manufacturing and trade related services sectors,” says Singapore’s central bank.

In particular, MAS notes that the prevailing composition of global growth has weighed on Singapore’s electronics manufacturing sector while the pullback in regional trade flows has reduced demand for transportation and storage services as well as wholesale trade activities.

With external demand still “fairly tepid”, MAS says Singapore’s trade-related sectors are unlikely to rebound strongly in the quarters ahead due to their greater exposure to underperforming industries in the global manufacturing sector.

“The underlying shift in the composition of global demand from investment to consumption is likely to be long-lasting, given the spending trends in the G3 and ongoing economic rebalancing in China,” it adds.

However, Singapore’s gross domestic product (GDP) growth is still expected to be shored up by modern services including the financial and ICT sectors. Demand for income-inelastic services, such as healthcare and education, should also remain robust despite emerging slack in the labour market, says the central bank.

As “nearly three-fifths of the effects from [its] past policy easing moves since January 2015 have yet to be transmitted through to the economy”, MAS believes the cumulative effects of its policy adjustments will “continue to provide some support to GDP growth and ensure price stability over the medium term”.

MAS repeated the government’s forecast for GDP growth to come in at the lower end of the 1-2% for 2016 and “only slightly higher” for 2017.

Earlier this month, MAS announced its intention to maintain its 0% slope in the Singapore nominal effective exchange rate (NEER) policy band for an “extended period”, given the modest outlook for Singapore’s economy growth in the year – reaffirming the neutral policy stance it adopted in April 2016.

MAS notes that price inflation in Singapore is “on a modest ascent” as energy-related components begin to contribute positively to inflation even as the disinflationary effects of services subsidies fade.

At the same time, core inflation is expected to continue rising in the coming months and average around 1% in 2016 before rising to 1-2% in 2017.

This article first appeared in The Edge Singapore Market Report.

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