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Prices of big-ticket items to ease fastest, says MAS

The economic crunch will squeeze consumption demand and push prices down, with the biggest impact likely to be on big-ticket items, says the Monetary Authority of Singapore.

In its latest Macroeconomic Review, MAS predicts a fall in CPI inflation to 2.5-3.5 per cent in 2009. And it expects underlying inflation - which excludes accommodation and private road transport costs - to be around 2 per cent.

Prices of big-ticket items are likely to ease quickest on the back of weak consumer sentiment. MAS says that car prices in particular could remain relatively low in 2009. Average COE premiums have already fallen about 20 per cent year-on-year so far in the second half of 2008. And the decline is expected to continue until an anticipated cut in COE supply for the new quota year starting April 2009.

Other early indications of weaker demand are obvious. Retail sales volume fell 1.5 per cent year-on-year from June to August, due to cautious local spending and lower demand from tourists, MAS says in the review. For local businesses, slower growth will mean an easing of cost increases next year - the pace of wage rises will moderate and rents will gradually ease.

The prices of the main external drivers of inflation - oil and food - will also ease, as demand and supply dynamics improve in world markets. According to MAS, prices of fuel-related items in the domestic CPI, such as petrol, will fall significantly based on current average annual oil price forecasts of US$80 a barrel for 2009.

Food prices look set to fall, too, with anticipated bumper harvests this year forcing international prices down. Domestic CPI food inflation will therefore moderate, says MAS, though it could remain above the past decade’s historical average of 1.1 per cent.

A MAS study highlighted in the review found evidence on pricing behaviour. This indicated that while importers are quick to pass on cost increases in a downturn, they are slow to pass on cost savings during robust growth.

Source : Business Times - 29 Oct 2008

Hardly any sector will be left untouched; growth next year expected to stay below trend

The full scale of the global financial crisis is yet unknown, but this much seems clear - virtually no sector in Singapore will escape unscathed, the Monetary Authority of Singapore (MAS) reckons.

Singapore’s GDP growth - expected to plummet to around 3 per cent this year - will likely remain below the trend range of 4-6 per cent in 2009, MAS says, as the repercussions of the financial turmoil hit even the manufacturing, transport and tourism sectors here in the wake of a sharp fall in sentiment and demand in key markets.

Domestic economic growth, which fell sharply in Q3, ‘could see further slippage in the quarters ahead’, says the central bank in its latest Macroeconomic Review. But the cutback in activity will be ‘cushioned somewhat’, it adds, by the ’strong cyclical starting point of the economy, flexible factor markets, a diversified and robust corporate base, and the ongoing buildup of capacity in key segments of the economy’.

MAS outlines in some detail how it sees the dynamics of the downturn course through the economy.

First, the global crisis has an immediate impact on sentiment-driven financial activities such as wealth advisory services. The brokerage and treasury and fund management segments, in particular, are likely to slow further, MAS says.

In the IPO market, lacklustre issuance activity will likely persist as heightened risk aversion will continue to make it difficult for firms to raise capital.

And as consumer sentiment weakens, the crisis also has a direct bearing on retail and property-related activities. The construction industry, however, is likely to stay ‘fully stretched’ in 2009 as it clears a ’sizeable backlog’ of projects.

But it’s the indirect impact that could exact a larger toll.

Amid a global economic downturn and a sharp pullback in spending in the external economies, many domestic sectors such as manufacturing and transport will also be ‘quickly’ affected.

The MAS review notes that Singapore’s IT industry has fallen temporarily out of sync with the global tech cycle. Still, the domestic electronics industry is not shielded against a demand-led global IT slowdown. But if it’s any consolation, the slowdown this time is unlikely to be of the same magnitude as the 2001 tech downturn, as there is now a ‘buffer’ in emerging market demand.

Overall, the balance of risks in the global economy - and at home - has shifted from rising inflation towards significantly weaker economic growth.

Prospects for a recovery here in the second half of 2009 hinge on developments in the G3 and regional economies.

But even the regional buffer is weak.

MAS economists now reckon that Asia’s initial or apparent ‘insulation’ - going by the weak link of the region’s business cycle with the developed countries - ‘is likely to wane in the coming months’.

With the G3 economies in the throes of a sharper and more broad-based downturn than previously anticipated, Asia will unlikely escape unscathed.

Further, with commodity prices now forecast to decline into 2009, Asia’s exports of commodities are expected to slow. GDP growth across Asia, excluding Japan and China, is projected to slip by one percentage point in 2009 from a year ago, and about two points below 2007 growth. This will take Asia’s growth to below trend for the second successive year, the MAS review notes.

And while the recent spate of globally-coordinated government measures have likely averted an outright financial system collapse, they are unlikely to reverse the momentum of economic weakness in the developed world.

‘At this juncture, the extent of the retraction in economic activity is uncertain,’ MAS says

Other findings from the review:

Some 27 per cent of the 7.1 per cent consumer price inflation during the first half of 2008 stemmed from rising oil prices.

A 10 per cent jump in oil prices will cut Singapore’s GDP growth by 0.1 percentage point in the first year and a further 0.6 percentage point in the second year.

Meanwhile, CPI inflation rises by 0.2 point in Year 1, and by another half-point in Year 2 as businesses pass on the higher costs to consumers.

Source : Business Times - 29 Oct 2008

Economists predict almost no growth, moderate recovery in second half

SINGAPORE’S slowing economy is likely to remain weak next year as the full impact of the financial crisis hits home, said the Monetary Authority of Singapore (MAS) yesterday.

The economy, already in a technical recession, will see ‘further slippage… ahead’ with the decline expected to spread to almost all sectors, from manufacturing to tourism.

The MAS in its second half-yearly macroeconomic review said that expansion is tipped to be ‘below its potential rate’ of 4 to 6 per cent next year.

The official growth forecast for this year has already been scaled down to about 3 per cent, while last week, Senior Minister Goh Chok Tong said that growth in 2009 could be below this year’s projection.

Economists The Straits Times talked to predict practically no growth next year. Most expect expansion of between 0 and 1.5 per cent with a moderate recovery in the second half of next year.

Citigroup’s Kit Wei Zheng, one of the more bearish economists with a tip that growth next year will be minus 1.2 per cent, said that ‘a recovery in the second half of next year should not be taken for granted. Any recovery will be gradual and will not take the V-shape of past recessions.’

MAS said that ultimately a recovery will be ‘predicated on the performance of the G-3 - the United States, Europe and Japan - and regional economies’.

The ripples from the financial tsunami are reaching virtually all important sectors. The report said Singapore’s economy has ‘entered a more advanced stage of weakness’.

Manufacturing and tourism have yet to feel the full force of the crisis but will eventually be hit as firms and consumers cut back on spending, in not only the G-3 economies, but across the region.

Electronics, which makes up 30 per cent of manufacturing, will continue its slide as firms scale down IT spending and defer outlays on tech upgrades.

The usually buoyant holiday season will offer scant relief for exporters since tech sales are likely to be lacklustre with consumers in major markets tightening their belts.

China, which analysts expect to grow at 7 to 8 per cent, is unlikely to give Singapore a boost because its recent contribution to export growth has been relatively small, said the MAS.

Tourism, with visitor arrivals in their third straight month of decline, is likely to be hit further as travellers from the region forgo holidays here.

The crisis has battered consumer sentiment and affected the financial services sector, property and real estate services, and shop and restaurant owners.

Cautious investors are choosing to put their money in safe assets or hoard cash, weakening the local wealth management industry. Asian hedge funds have also been hit by redemptions, forcing them to offload assets.

But the MAS believes that the domestic fund management industry has ‘underlying strength with the ongoing structural wealth generation in Asia’.

Household wealth has been affected by falling asset prices so retail sales will be hit as consumers cut back spending. This will mean retailers could see slower business towards Christmas and into 2009, said the MAS.

One spot of relief is that the pharmaceuticals sector may offer some moderate cushion next year when two new facilities - belonging to Abbott and Novartis - are expected to open.

The drug-making industry largely operates on its own supply cycle, but has generally been weak this year due to a delay in new drug approvals from the US and competition from generic medicines.

The industry is also notoriously volatile. Last month’s manufacturing figures were boosted by a surprising rebound in pharmaceutical output.

Another sector bucking the trend is construction, which will likely ride out 2009 well as backlogged projects awarded from previous quarters get under way, MAS said. Large-scale private sector projects like the integrated resorts and the Marina Bay financial centre will also keep the industry busy through 2010.

However, construction’s share of GDP is small so any contribution to overall growth will be limited.

Source : Straits Times - 29 Oct 2008

JOB losses are looming as Singapore’s economy slows, with manufacturing and financial services companies expected to be among the first to cut staff.

This means unemployment is likely to rise over the next few quarters, while salaries will grow at a much slower pace, said the Monetary Authority of Singapore (MAS) in its latest half-yearly Macroeconomic Review, released yesterday.

The jobless rate for the third quarter is due out this Friday, and is expected to be higher than the 2.3 per cent seen in the second quarter.

Last week, Trade and Industry Minister Lim Hng Kiang warned that unemployment for the whole year is likely to come in higher than last year’s 2.1 per cent given the effects of the global financial turmoil.

Economists are tipping that the jobless rate will reach 3 per cent by year end or early next year, and rise to close to 4 per cent towards the end of next year - a level not seen since the Sars period in 2003.

Although businesses are ‘not planning to drastically reduce head count at the moment’, the MAS said employers are turning cautious about hiring given the more uncertain outlook next year.

It cited the most recent Manpower Employment Outlook Survey, which showed that only a quarter of the 629 firms surveyed here plan to increase their head count in the fourth quarter.

The rest mostly expected no change, although some are still uncertain and 10 per cent will cut jobs.

Wages will also come under pressure. They are expected to grow about 5 per cent this year but rise only 2 per cent next year, said the MAS.

Already, salary hikes have declined sharply. Nominal wages climbed 11 per cent in the first quarter over the previous year, boosted by a round of civil service bonuses, but then rose only 3.1 per cent in the second quarter, partly because of a high base the year before.

‘The outlook is generally bearish,’ said OCBC economist Selena Ling.

‘As the global downturn continues to prick strongly on people’s minds, employers are going to be cutting back.’

Even pump-priming by the Government - which refers to state spending to stimulate the economy - is likely to be in infrastructure, which ‘may not fully translate into local job gains’.

But Ms Ling added that unemployment last year - which fell to 1.7 per cent in the second half of the year - was an ‘unbelievable’ rate.

‘A more normal rate is probably about 3 per cent, but that means the resident unemployment rate, excluding foreigners, will be higher than that,’ she said.

The jobless rate, calculated by dividing the number of unemployed people by the total workforce, is also rising partly because more fresh graduates are entering the job market, said Citigroup economist Kit Wei Zheng.

He expects unemployment to average 2.6 per cent this year and continue edging up next year to hit 3.6 per cent.

Within manufacturing, the MAS believes hiring in petrochemicals and transport engineering ’should hold up relatively well’, but electronics jobs will take a hit due partly to softening global demand for IT products.

The global financial crisis and bank consolidations will also translate into job cuts in the financial services industry here, where many multinational corporations have set up home. ‘Several major foreign financial institutions have already announced retrenchments worldwide, which could lead to some job losses in their local offices,’ said the MAS.

Even construction, which is still growing at a fairly healthy pace, is likely to see fewer jobs created as a shortage of labour and material leads to project delays, the MAS added.

OCBC’s Ms Ling also expects business services such as commercial leasing and conveyancing to be hit, as they are ‘very tied to the property boom’, which is now over.

But selected industries such as hospitality and health care still have thousands of job vacancies that need to be filled, said the MAS.

The integrated resorts and related firms alone will generate about 60,000 jobs over the next few years, while 7,000 jobs are expected to be created in health care over the next five years.

Source : Straits Times - 29 Oct 2008

Lower oil and food costs, weaker growth should curb price rises

CONCERNS over inflation are receding as oil and food prices come down and are expected to fall even more next year, said the Monetary Authority of Singapore (MAS) yesterday.

A weaker economy and property market will also mean lower consumer demand and falling rents, which will further help ease price increases and cost pressures, the central bank added in its latest Macroeconomic Review.

A major worry just a few months ago, inflation is now taking a back seat to GDP growth as Singapore’s key economic concern amid a global slowdown. This was reflected in the MAS decision to shift to a zero appreciation policy for the Singapore dollar earlier this month.

The MAS expects inflation next year to taper off to between 2.5 per cent and 3.5 per cent, a far cry from this year’s 6 to 7 per cent. Last month’s inflation came in at a higher-than-expected 6.7 per cent on the back of higher housing and electricity costs.

Underlying inflation, which excludes housing and private transport costs such as road tax, is tipped to drop to around 2 per cent next year, from 5 to 6 per cent this year.

In contrast, the Government’s full- year economic growth forecast has been lowered three times this year to ‘around 3 per cent’ now and is not expected to be much higher next year.

Some of the key sources of inflation in the first half of this year have already eased in recent months. Petrol pump prices fell in tandem with oil prices, while private road transport costs dropped due to lower road tax and falling COE prices.

Businesses will also get some relief from cost increases as labour, utilities and rental - the major contributors to higher costs this year - are likely to see only modest gains next year, if any at all, said the MAS.

But it cautioned that costs have risen sharply in the last year in response to strong economic growth and will probably not drop significantly anytime soon.

Prices of basic food items such as wheat, maize and rice, for instance, have dipped in recent weeks, but are unlikely to fall back to the low levels seen in previous years.

Crude oil prices have halved from their peak in July, but firm demand from emerging economies as well as the high marginal costs of oil production and exploration will limit further price falls, the MAS added.

The prices of some goods and services will also react belatedly to the first round of inflation earlier this year, which will keep costs ’sticky downwards for a while’. An example is household electricity tariffs, which were raised this month and will add about 0.7 of a percentage point to inflation in the fourth quarter.

Although inflation is subsiding at a slower-than-expected rate, OCBC economists said relief should come in the first half of next year, ‘when the recession story hits home’.

They predict a 2 to 4 per cent inflation rate next year as consumers start trimming their spending, especially for discretionary items such as cars, luxury items and recreational activities.

Source : Straits Times - 29 Oct 2008