Singapore’s patchy recovery may push back tigher policy

Singapore’s recovery from its worst recession faltered in the fourth quarter, leading some economists to suggest the central bank may hold back from tightening monetary policy.Neil Chatterjee & Kevin Lim

Singapore’s recovery from its worst recession faltered in the fourth quarter, leading some economists to suggest the central bank may hold back from tightening monetary policy until later in the year.

Markets had so far expected the central bank to shift towards tighter policy at its next review in April, by allowing its currency to strengthen gradually. Some economists now believe there will be no change until the following meeting in October.

“The numbers are still patchy, which is a reminder to policymakers that it is not going to be plain sailing,” said Song Seng Wun, an economist at CIMB in Singapore. “Monetary policy may still have to be maintained until we see signs of a stronger pickup.”

The economy shrank 6.8 percent on a seasonally adjusted and annualised basis in the fourth quarter, reflecting weaker manufacturing. The contraction was much bigger than the 0.8 percent drop analysts had forecast in a Reuters poll.

The Singapore dollar, the central bank’s main policy tool which it manages against a secret trade-weighted basket of currencies, stood at 1.4023/33 per U.S. dollar by 0710 GMT, little changed from levels of 1.4020/50 before the data.

The trade-dependent economy leapt out of its deepest recession in the second quarter last year. It grew an annualised 14.9 percent in the third quarter, before the fourth quarter reversal driven by a plunge in drugs production.

On a seasonally adjusted and annualised basis, manufacturing shrank 38.4 percent from the previous quarter, while construction grew 4.3 percent and service industries expanded 7.2 percent.

Hero to villain

Monthly data has shown that drugs output, which led the third quarter recovery, slumped 48.8 percent in November. Drug production cycles are fickle and new plants opening in the first quarter of 2010 are likely to drive a manufacturing rebound.

“The volatile pharmaceutical industry turned from hero to villain in the fourth quarter,” said Alvin Liew, an economist at Standard Chartered in Singapore. “A more sustained recovery will require a broad return of global consumer demand.”

“With risks skewed towards a gradual recovery, manufacturing still on shaky ground, and core inflation remaining benign, we expect the Monetary Authority of Singapore to take a cautious approach to monetary policy tightening and keep (April) policy unchanged.”

Liew said that early tightening was more likely in countries with big domestic markets such as Indonesia, rather than those depending on exports such as Singapore, Malaysia and Thailand.

Between October and December, the economy grew 3.5 percent from a year earlier, the second quarter of growth after three quarters of annual contraction. In 2009, GDP fell 2.1 percent, largely in line with forecasts.

Separate data on Monday showed residential property prices rose 7.3 percent in the fourth quarter, though the rally slowed after government moves to dampen speculation amid fears of a new property bubble.

Economists said Asian policymakers are more likely to cool home prices by tightening bank loan rules than by raising interest rates.

Singapore’s government expects growth this year to moderate to between 3 percent to 5 percent and forecast inflation of between 2.5 percent and 3.5 percent.

“2009 ended with a whimper rather than a bang for the Singapore economy,” said Robert Prior-Wandesforde of HSBC. “Is Singapore returning to recession and does this herald weak numbers throughout the region? We very much doubt it.”

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