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Growth, price rises seen moderating in next 2 to 3 years

Asian economies face slower growth but are not yet at risk of stagflation despite current high inflation, a senior economist at Standard Chartered Bank said yesterday.

Tai Hui, the bank’s head of South-east Asian economic research, said Asian countries including Singapore are more likely to see both the pace of economic growth and price increases moderate in the next two or three years.

‘The risk of stagflation is relatively low,’ he told an audience of about 150 of the bank’s clients here.

For Asian countries outside Japan, ‘inflation this year will pick up, but the next two years should see inflation moderating’ as growth slows, he said.

Soaring prices and slower growth in most countries in the region have prompted worries that Asian economies could be gripped by stagflation - stagnant economic output combined with a vicious cycle of rising consumer prices and wages that eat into household budgets and company profits.

A stagflationary trap is difficult for policy-makers to escape from without either stifling the economy or pushing inflation higher.

‘The talk of stagflation is probably a bit overstated, but in the short term it is giving central banks a headache,’ Mr Tai said.

Both advanced and emerging economies in Asia are facing the twin problems of higher inflation from rising oil and food prices and a deteriorating economic outlook amid falling demand from major markets in the US and Europe. Until recently, most central banks were reluctant to raise interest rates or allow their currencies to strengthen to fight rising inflation, for fear of hurting economic growth further.

Official data released this week in Singapore, Hong Kong, Malaysia and Vietnam shows inflation is likely to remain a big concern for policy-makers in each of these economies for at least the next few months.

In Singapore, inflation was running at a 26-year high of 7.5 per cent in April-June, as measured by the change in the consumer price index (CPI) from the same month a year earlier.

Economists expect a lower inflation rate for July, as prices in the same month last year were boosted by the hike in Goods and Services Tax from July 1.

Yesterday, the Monetary Authority of Singapore raised its forecast range for inflation this year to 6-7 per cent, from 5-6 per cent previously.

Singapore’s economic output - measured by gross domestic product - grew just 1.9 per cent in the second quarter from a year earlier, according to government estimates published earlier this month.

In Vietnam, the main stock benchmark index has tumbled 9.8 per cent this week after regulators there raised retail fuel prices more than 30 per cent on Monday - an indication of how inflationary pressures can affect financial markets as well as longer-term economic growth. Official estimates published yesterday show consumer prices in Vietnam rose 27 per cent this month compared with a year ago.

Source : Business Times - 25 Jul 2008

Forecast for 2008 raised to 6-7% but various factors suggest that price pressures may have peaked

The Monetary Authority of Singapore yesterday sought to allay fears of further rises in price pressures this year, even as it raised the inflation forecast for 2008 and spelt out the economic challenges ahead.

As had been expected following June’s 7.5 per cent pace, MAS has raised - for the third time this year - the official headline consumer price inflation forecast for 2008, by one full point to 6-7 per cent.

Speaking at a press conference on its latest annual report, MAS managing director Heng Swee Keat said the full-year rate will likely come in at around 6.5 per cent.

And with the first-half average at 7.1 per cent, the new forecast for 2008 implies that the inflation rate should ease over the rest of the year. MAS cites four reasons: Firstly, the one-off impact of last July’s Goods and Services Tax hike will disappear from this month.

Secondly, while commodity prices will likely remain high, any further price increases are expected to be milder.

At home, there are also early signs of easing cost pressures as the economy slows, Mr Heng notes. Increases in commercial rentals appear to have peaked, and recent employment surveys show more cautious hiring, he said.

And not least, MAS’ monetary tightening policy will continue to cap cost and price pressures, he added.

Between April 2004 and June 2008, the Singapore dollar appreciated by 23.4 per cent against the US greenback. As a result, while oil prices have surged by more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose by about 30 per cent each, according to MAS.

Currently at a 26-year high, the headline inflation rate should continue to trend downwards in 2009 as well, Mr Heng said.

But Singapore cannot totally insulate itself from the hikes in global food and oil prices, and needs to ensure that external price changes do not trigger second- round effects, he said.

In a report this week, the Asian Development Bank voiced concern that a more broadbased second-round effect of price hikes may be underway across Asia, noting that the pick-up was ‘most visible’ in a few economies, including Singapore where core inflation rose to 6.8 per cent in May.

MAS’ own underlying inflation rate - one measure of core inflation that excludes housing and private road transport costs - has risen to 5.9 per cent in the first half of 2008.

Mr Heng yesterday said MAS’ current monetary policy stance - following two rounds of tightening, in October 2007 and April 2008 - ‘remains appropriate’, and will be reviewed in October.

In its annual report, MAS sees Singapore’s economic growth easing in the next few quarters in view of slowing external demand, but maintains the full-year growth outlook at 4-6 per cent.

Said Mr Heng: ‘In the coming months, activities which rely directly on G3 demand (US, Japan and Euro area), such as electronics manufacturing, or are sentiment-driven like stockbroking, will be more adversely affected by the global headwinds.’

But the more domestic-driven industries, including construction, marine and offshore engineering, and financial services, are expected to continue to provide support to GDP growth for the rest of the year, he added.

‘Given the uncertainty in the external environment, we will be carefully monitoring the incoming data.’

Global economic growth is expected to fall to 2.9 per cent this year from 3.8 per cent in 2007, according to market forecasts.

Slower growth, coupled with turbulence in the financial markets and rising inflationary pressures, all make for a most challenging environment, both globally and domestic.

Source : Business Times - 25 Jul 2008

INFLATION is now tipped to average out at between 6 and 7 per cent this year after the Government lifted its forecast for the third time this year.

The new estimate is 1 percentage point up from the previous range of 5 to 6 per cent. This is the biggest upgrade this year and comes as inflation averaged 7.1 per cent in the first six months.

The Monetary Authority of Singapore (MAS) cited the usual causes when it issued the new forecast yesterday - high crude oil and food prices and inflation pressures at Singapore’s trading partners.

But there is some good news: Price rises should now start moderating as domestic cost pressures in the labour and commercial property markets seem to be easing.

‘There are early signs…as the economy slows and asset markets consolidate,’ said MAS managing director Heng Swee Kiat. ‘The rate of increase in commercial rentals appears to have peaked. Recent surveys have also shown that employers have become more cautious about hiring.’

He said prices should rise on average between 4.9 and 6.9 per cent in the second half of the year.

Apart from slower cost increases at home, he said inflation ought to moderate as commodity prices should rise less sharply. The basis effects from last July’s goods and services tax hike will also wear off, he added.

Mr Heng said the ‘pre-emptive’ moves in April and last October to allow the Singdollar to appreciate faster has taken some of the sting out of costlier imports, and so restrained inflation.

‘While oil prices in US dollar terms have increased more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose by around 30 per cent each.’

Mr Heng said inflation expectations here are ‘well anchored’ and so a wage-price spiral is unlikely. He said the current monetary policy remains appropriate, which is seen as a hint that the central bank will not allow faster currency appreciation at the next policy review in October.

As for economic growth, he reiterated the official 4 to 6 per cent estimate.

DBS Bank economist Irvin Seah said the new forecast is realistic, but is less sanguine about commercial rentals: ‘Firms have told me that landlords continue to have a ‘take it or leave it’ stance when discussing rentals.’

Source : Straits Times - 25 Jul 2008

But magnitude of MAS forecast revision surprises economists

The official word is in: Singapore’s inflation for the year has peaked barring any new external shocks, according to the Monetary Authority of Singapore (MAS).

After seeing inflation unexpectedly average7.1 per cent in the first half of the year, the MAS has raised its full-year forecast by 1 percentage point to 6 to 7 per cent.

This is the third time in the last five months that it has revised its outlook. While expecting this, economists were surprised by the magnitude of the revision.

HSBC senior economist Robert Prior-Wandesforde observed: “For inflation to remain in the previous band, it requires the Consumer Price Index (CPI) to see no increase between June and December which is somewhat optimistic.”

He added: “Everyone is surprised by the strength of inflation. Singapore is not alone but I feel the adjustments could have been made earlier.”

Explaining the revision, MAS managing director Heng Swee Keat said while global oil prices are coming down, the second quarter still saw a 27.6-per-cent increase to US$125 a barrel.

Said Mr Heng: “Our major trading partners are also facing a a rise in inflationary pressures. Apart from oil, food prices are expected to remain elevated, even as the rate of increase moderates.”

Still, Mr Heng said the new forecast range “implies that headline CPI inflation is expected to come down for the rest of the year”.

Mr Heng cited four reasons inflation should now fall: The impact of the Goods and Services Tax hike last July waning off; milder price increases for commodities; easing of domestic cost pressures; and the MAS’ own monetary policies, including “pre-emptive” tightening moves last October and April.

Between April 2004 and last month, the Singapore dollar had appreciated 23.4 per cent against the greenback, making some imports comparatively cheaper in currency terms. Mr Heng said that MAS policy moves, in particular, “have had a clear restraining effect on CPI inflation”.

For instance, while global oil prices have increased by more than 70 per cent since a year ago, domestic electricty tariffs and petrol prices have each risen around 30 per cent. Similarly, while the International Monetary Fund’s global food and beverage index has soared by 43 per cent in the same period, Singapore’s food prices “picked up by a more moderate 9 per cent”, said Mr Heng.

While exports are expected to slow in the second half of the year, MAS said it would continue to allow the Singapore dollar to appreciate to mitigate against inflationary pressures.

Overall, the Government is sticking to its original GDP growth forecast of 4 to 6 per cent at least for now.

But Mr Heng said: “Given the uncertainty in the external environment, we will be carefully monitoring the incoming data.”

“These external developments - higher oil prices, continued high prices of food and inflationary pressures in our trading partners - have affected Singapore because of our openness and heavy dependence on imports.”

He also dismissed the likelihood of Singapore falling into a technical recession - defined as two straight periods of quarter-on-quarter GDP contractions.

In fact, the MAS is expecting continued and moderate economic growth over the next two quarters, supported by the construction, marine and offshore engineering and financial intermediation services sectors.

Agreeing that Singapore would avoid a recession, Deutsche Private Wealth Management Asian strategist Chua Hak Bin nevertheless felt that GDP growth would be “lacklustre”, given how the US slump is impacting the global economy.

Said Dr Chua: “There are clear signs that Europe is seeing quite a significant slowdown. Going forward, there is a risk that Asia could cool down quite a bit as well because a lot of Asian Central Banks are tightening their monetary policies quite aggressively.”

One thing economists agree on is that the unpredictability of the global economy has been throwing forecasts out of the window.

Source : Today - 25 Jul 2008

Singapore’s central bank has revised up its inflation forecast for 2008 for the third time. It now expects inflation to come in at between 6 and 7 per cent from its initial estimate of 5 to 6 per cent.

The Monetary Authority of Singapore (MAS) said this is due to the impact of external developments like higher oil and food prices on Singapore’s open and trade-dependent economy.

The central bank, however, is maintaining its current monetary policy stance for a slow and gradual appreciation of the Singdollar.

MAS believes that inflation in Singapore has peaked this year. Inflation has stayed unchanged for the previous three months, at 7.5 per cent - a 26-year high. For the first half of the year, consumer inflation averaged 7.1 per cent.

In the coming months, inflation is expected to moderate because the one-off impact of the GST hike last year will stop affecting headline inflation in July.

MAS also expects global commodity price increases to be milder. Domestic cost pressures are likely to ease as the economy slows and asset markets consolidate.

Recent employment surveys have also shown that labour market pressures could be easing.

While most economists agree that inflation will come off in July, they say what is key will be the rate at which it moderates.

Irvin Seah, economist at DBS Group Research, said: “It will decrease at a slower rate compared to what we thought so earlier, because of policy-induced inflationary pressure. Having said that, oil prices recently have shown signs of moderation. If that’s sustainable in longer term, it means inflation could come off quite a fair bit.”

Between April 2004 and June 2008, the Singapore dollar appreciated 23.4 per cent against the greenback - a policy move that the MAS said has had a restraining effect on consumer inflation.

It said its monetary policy tightening will continue to restrain cost and price pressures going forward.

For example, while oil prices have increased by more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose only by around 30 per cent.

Despite the full-year inflation being revised upwards, the central bank is keeping its forecast that the Singapore economy will grow between 4 and 6 per cent this year, which some economists say is optimistic.

Alvin Liew, economist at Standard Chartered, said: “We are looking at slower second half this year due to worsening external markets affecting export demand. Already, we see that the manufacturing sector did not do very well in the second quarter and might see the weakness being continued into the third quarter itself.”

A hint of that could be found in manufacturing data out on Friday.

Mr Liew said: “One of the important things we can look out for is tomorrow’s manufacturing number for June. If it comes worse than expected, then we can probably see a downward revision for the manufacturing sector again for second quarter, and then maybe we’ll see the government’s forecast range being revised down. I’m looking at probably a half to one percentage point downward revision.”

Between inflation and growth risks, analysts say, inflation will remain the larger risk for 2008, although this may switch in 2009 should global growth continue to slow.

Singapore’s economy grew 7.7 per cent last year.

Source : Channel NewsAsia - 24 Jul 2008