Singapore’s economy shows signs of overheating

Shamim Adam
06 Oct 07

Singapore’s economy risks overheating as home prices reach the highest in a decade, companies hire workers at an unprecedented pace and the stock market soars to record levels, economists say.

Inflation at a 12-year high and an economy expanding “a little too rapidly” mean signs of overheating are “a few too many for comfort,” Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore, said in an Oct. 3 report.

“Consumer prices are by no means the only thing running relatively hot in the economy at present,” Prior-Wandesforde said. “A buoyant labor market was accompanied by strong wage growth. The Straits Times index has also risen nearly 50 percent over the last year.”

Singapore’s economy grew an annualized 14.4 percent in the second quarter, the fastest pace in two years, fueled by construction and financial services. Employers added a record number of workers in the same period, pushing the jobless rate to a six-year low as service companies increased hiring.

“The overheating problem in India and China has now spilled over to Singapore,” Deyi Tan, an economist at Morgan Stanley in Singapore, wrote in an Oct. 3 report. “Not only has persistently strong growth resulted in an office space crunch, labor supply needs have also led to a jump in the foreign population. Residential property is booming and expat schools are oversubscribed.”

Office rents in Singapore’s central business district are at record highs as financial institutions, lured to the city- state by corporate tax cuts, expand their businesses.

Home Prices

Singapore’s private residential prices rose 8 percent to a 10-year high in the third quarter, the government said on Oct. 1. Home prices have increased every quarter in the past 3 1/2 years, according to data from the Urban Redevelopment Authority.

Singapore’s consumer price index increased 2.9 percent in August from a year earlier, in part after an increase in the goods and services tax the month before.

The central bank expects inflation in 2007 to be between 1 percent and 2 percent, it said on Aug. 27, up from a previous range of 0.5 percent to 1.5 percent. Consumer prices may rise as much as 2 percent next year.

The island’s longest economic expansion since 1991 and the prospect of higher salaries are prompting more Singaporeans to enter the labor force. Average monthly wages climbed 8.5 percent in the second quarter, the fastest since 2000.

Income gains are fueling consumer spending at restaurants and department stores, and may help the economy achieve the government’s forecast of as much as 8 percent growth this year.

‘Signs of Overheating’

The $134 billion Southeast Asian economy may expand 8.5 percent this year, and grow 7.3 percent in 2008, HSBC predicts.

“If forecasts are right and the country can look forward to another 12 months of above-trend expansion, then there will be less and less spare capacity in the economy and hence more and more signs of overheating,” Prior-Wandesforde said.

The Monetary Authority of Singapore targets its currency instead of interest rates to guide monetary conditions and control price gains.

The central bank will probably maintain a three-year policy of allowing a “modest and gradual” appreciation of its currency when it reviews its policy next week, the HSBC and Morgan Stanley economists said.

The city-state’s government may also take steps to cool demand for homes and ease the labor market crunch, Prior- Wandesforde said.

It may avoid waiting too long and “act sooner rather than later” to damp property price gains, he said. “Increasing immigration quotas is another tool that has been used in the past to cool a hot labor market.”

A slowdown in the economies of the U.S. and others globally may also ease Singapore’s risk of overheating, the analysts said.

“Singapore remains the most exposed to external conditions within Asia,” Morgan Stanley’s Tan wrote. “The global soft-landing that lies ahead will help cool the economy.”