Singapore Economy Likely To Cool To Slower Pace This Year
But local demand should pick up some slack as US growth eases; building sector expected to thrive
In the new year, expect interest rates to fall, overseas spenders to scrimp and local consumers to come to the rescue.
But above all, expect the economy to waltz to a slower tempo than before.
That growth will ease is the one thing economists widely agree on in their 2007 outlook for Singapore.
They forecast that the country’s gross domestic product will increase by 5 to 6 per cent this year, after a blistering rise of 7.7 per cent last year.
With three good years behind it, ‘few expect Asia will repeat its above-trend performance in 2007′, said Standard Chartered Bank (Stanchart) economists in a report.
The overwhelming reason? Export-oriented economies such as Singapore’s will inevitably be bogged down by the housing-led decline in the United States.
Economists are still uncertain how sharp or how long the ride downhill will be for the US.
However, they predict that as American consumers tighten their belts, consumers in most Asian economies will loosen theirs.
Much hinges on US outlook
THE greatest danger this year will be the risk of a hard landing or sharp slowdown in the US, said Ms Selena Ling, OCBC Bank’s head of treasury research.
Stanchart economists concurred: ‘Although China has become an important trade partner for many Asian economies, the US continues to be the top driver of Asian exports.’
Export-dependent Hong Kong, Malaysia, Singapore and Taiwan would be worst hit if things go awry in America, they predicted.
On the other hand, economists at Citigroup reckon that the darkest hour may already be over for the US.
‘Our base line is that the US economy already bottomed out during the third quarter of 2006 and is likely to continue its uptrend over the next two years,’ they said in a report.
Construction on a roll, at last
IN STARK contrast to the cooler external environment, industries that ride on domestic demand are set to thrive. The result - an economy that is cool on the outside but hot on the inside.
The hot sectors include property, finance and, at last, construction.
After shrinking for nearly five years, the construction industry will finally play a starring role this year, spurred by the property boom and several billion-dollar projects lined up.
Deutsche Bank economist Sanjeev Sanyal predicted: ‘The revival of the construction sector will be one of the remarkable trends in the next two years.’
The export-reliant electronics sector, on the other hand, is moderating to a slower pace.
‘With the Straits Times Index hitting new highs and the property market now in an upturn, the domestic sector is entering a virtuous cycle,’ said Stanchart economist Joseph Tan.
He added that the domestic wing will ‘decouple’ from the softening export sector.
Retailers should also rejoice: The so-called ‘wealth effect’ from higher asset prices may encourage more consumer spending.
Climbing real estate prices should also make home owners more willing to spend, said Mr Sanyal.
Interest rates poised to drop
MORTGAGE borrowers can heave a sigh of relief.
Interest rates, which have risen relentlessly since 2004, appear to have peaked and can only head down, in the US and most Asian countries.
A clouded US outlook and tame inflation mean that the Federal Reserve, which paused in its rate hike cycle last August, may start cutting rates in the second quarter of this year, said analysts.
Asian central banks, with the exception of China, India and Japan, are expected to follow suit.
The closely watched federal funds rate could end the year at 4 per cent, from 5.25 per cent now, said United Overseas Bank (UOB) economists.
They also reckon that the local benchmark interest rate - Singapore’s three-month interbank offered rate - will slide to 3.2 per cent from the current 3.44 per cent.
Asian currencies play catch-up
IF 2006 was the year of the falling US dollar, 2007 is set to be another year of decline.
The difference is, after weakening against the euro, sterling and Kiwi dollar, the greenback is poised to fall more against Asian currencies this year.
‘Asian currencies, including the Singapore dollar, will continue the second leg of the US dollar correction,’ said UOB economists.
But regional central banks will increasingly take their cue from China’s central bank, which they expect will let the yuan rise by another 3 to 5 per cent this year.
Asian economies are willing to let their currencies strengthen, but not so much that their exports lose competitiveness, said analysts.
The Singdollar could average 1.51 against the greenback this year, and 1.44 next year, predicted Citigroup economist Chua Hak Bin.
The Monetary Authority of Singapore is expected to maintain its policy of gradual and modest Singdollar appreciation, he said, adding: ‘Only a severe US downturn and a bird flu epidemic pose potential threats, but such scenarios remain a low probability.’
Oil prices may not ease much more
PETROL may get cheaper this year, but not by much.
After zooming above US$75 a barrel last year, crude oil prices will average US$56 a barrel this year, due to higher oil production, predicted the Australian Bureau of Agricultural and Resource Economics.
But given potential supply disruptions and geopolitical uncertainties, there is a chance that crude prices may rise again, said UOB economists, calling a range between US$55 and US$75 a barrel ‘conceivable’.
Source : Straits Times - 1 Jan 2007
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