Singapore’s economy faces “further slippage”

October 28, 2008
Singapore Democrats

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Shamim Adam

Singapore’s economy, which entered a recession last quarter, faces “further slippage” as a global slowdown threatens manufacturing, consumer spending and tourism, the city-state’s central bank said.

The Southeast Asian economy, which is forecast to grow 3 percent in 2008, will probably continue to expand below its “potential rate” next year and a recovery in the later part of 2009 will depend on the global outlook, the Monetary Authority of Singapore said in a twice-yearly review today.

“As the financial crisis evolves into a broader and more protracted contraction in economic activity worldwide, there will be significant knock-on effects for Singapore, given its heavy exposure to external demand,” it said. “The balance of risks facing the Singapore economy is currently tilted towards a further slippage in growth.”

The Monetary Authority of Singapore this month ended a policy favoring gains in its currency in an effort to support the economy and as inflation eased from a 26-year high. Central banks around the world are loosening monetary policy and cutting interest rates as a worsening global credit crisis saps growth.

The central bank’s “zero-percent appreciation” policy stance is a reversal from six months ago when it called for faster exchange-rate gains to damp inflation. Since then, the monetary authority said inflation has peaked, and it predicts price gains will halve next year from 2008’s rate.

“Provide support”

“The policy stance will provide support for the economy while ensuring low and stable inflation over the medium term,” the report said. “The slowdown in the Singapore economy will help to cap further escalation in cost pressures.”

The central bank expects consumer prices to rise between 6 percent and 7 percent this year, the biggest gain since 1981. Inflation will probably be between 2.5 percent and 3.5 percent in 2009, it said.

Singapore’s financial services industry won’t escape unscathed from the global credit crunch, the central bank said. Financial institutions worldwide have reported more than $600 billion in losses and writedowns.

“The global financial crisis will have an immediate impact on the sentiment-driven segments of the domestic financial industry as risk aversion increases,” the report said. “The brokerage and treasury and fund management segments are likely to slow further amidst the volatile market climate.”

Singapore’s industrial output last quarter was the worst in almost seven years and electronics exports have dropped for 20 consecutive months.

Jobs growth

“The domestic electronics industry would not be shielded against a demand-led global IT slowdown,” the central bank said. “A broader recovery across the technology sector and in turn the domestic electronics industry will not come until demand shows clearer signs of firming.”

As the economy weakens, growth in jobs and wages may also slow, the central bank predicts. The economy added an unprecedented 143,800 jobs in the first half.

“Labor market conditions will become more difficult going forward, with the unemployment rate likely to rise over the next few quarters,” the report said. “The moderation in employment growth will especially be felt in the manufacturing and financial services sectors.”

Wages may rise about 2 percent next year, compared with a projected 5 percent in 2008, the monetary authority said.

Real estate

Singapore’s private home prices dropped last quarter, signaling an end to a real-estate boom that began four years ago. The central bank expects a drop in property transactions as developers introduce fewer projects, while bank loans to the construction industry may also taper off, it said.

Retailers and restaurants may also see a decline in sales as consumer confidence ebbs and tourist arrivals falter, the central bank said.

“As falling asset values dent household wealth and a more precarious economic outlook dampens consumer confidence, there could be some reining of discretionary spending,” it said. “A softening of economic activity in key regional markets in the period ahead could also further reduce tourist arrivals and the demand for corporate travel.”