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The Prime Minister’s message is crystal-clear - while Singapore has enjoyed good growth in the last few years and extending into the first quarter of this year, the road ahead is going to get bumpy.

If anything, the macroeconomic softness that started in the United States is spreading to the Eurozone, Japan and even Asia. Key markets such as China and India have also begun to slow from the combination of moderating external demand and domestic monetary policy tightening.

Political uncertainties in the region has also notched higher in selected neighbouring countries, which may weigh on foreign investor sentiments in the short term.

Therefore, Singaporeans have to be mentally prepared for tougher times ahead.

Inflation is still a key challenge for the man on the street, with the headline consumer price index growing at 7.5 per cent on-year in the second quarter. While we at OCBC expect inflation to moderate to around 4 per cent next year, it is unlikely that it would return to the pre-2007 norms of 1 to 2 per cent, barring a global recession.

The unemployment rate has risen from record low levels to 2.3 per cent in the second quarter this year and looks set to creep higher in the coming quarters.

Businesses are already turning more cautious in their capital expenditures and hiring plans. Manufacturers and exporters are already feeling the heat from slowing end-demand from the developed economies and the strength of the Singapore dollar.

The tightening of financial belts is inevitable and many people have begun to do so. The property and equity market sentiments have softened in recent quarters and may continue to retreat or remain lacklustre in the next few quarters.

The recent correction in commodity prices, especially crude oil, may alleviate some of the inflationary pain, but it is still too early to say if those prices would fall further, and if they would stay low for a sustained period of time.

Demand destruction may drive near-term commodity prices lower in the near-term, but a fundamentally tight demand-supply balance and geopolitical risks would probably remain for some years to come.

In the interim, the Singapore government is helping by lightening the burden of inflation through Growth dividends, Workfare, ComCare and other ways, but it cannot reverse the tide of rising prices globally, given that Singapore is a small and open economy.

In particular, the government has reiterated that it cannot forsake the short-term medicine of necessary economic measures, like the Goods and Services Tax (GST), to ensure an efficient and competitive economy for the medium-term.

Singapore’s medium-term strategy remains unchanged throughout this rollercoaster ride - positioning the Singapore economy for long-term involves building up the economy, attracting and retaining the talents, and continually investing in education, infrastructure, and encouraging reproduction. Fortunately, Singapore is well-positioned to do so, with strong reserves, a committed and clean government, able and multi-talented Singaporeans.

So yes, GDP growth is likely to moderate to 4.8 per cent (OCBC’s full-year forecast) in 2008, while inflation should exceed 6 per cent for the full-year. But hopefully, one year from now, we would see a more benign global growth and inflation environment. And in the years to come, the Singapore economy would be reaping the benefits of the fourth university and integrated resorts amongst others.

The writer is head of treasury research and strategy at OCBC Bank. The opinions expressed are her own.

Source : Today - 11 Aug 2008