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Record jobs created, resilient GDP ahead - but inflation, labour costs a concern

It was, in the words of one analyst, an “extraordinary” first quarter for the job market in Singapore. And looking ahead, economic growth forecasts by private-sector economists - though adjusted downwards - have turned out better than expected.

Even with a slowdown predicted for the months ahead, a record 73,200 jobs were created in the first quarter of the year, according to the Ministry of Manpower’s (MOM) Labour Market report released yesterday.

Meanwhile, the Monetary Authority of Singapore’s (MAS)latest survey of forecasters showed that Gross Domestic Product (GDP) could increase 5.5 per cent this year, marginally down from the median forecast growth of5.6 per cent in the previous quarterly survey in March.

Such resilient figures are thanks to surprisingly bullish growth of 6.7 per cent in the first three months, say analysts. This “stronger than expected” showing, said DBS economist Irvin Seah, “shows that things are holding up pretty well, that’s why you don’t see further downgrades.”

It was also not surprising to see robust employment growth in the first quarter, said Institute of Policy Studies adjunct senior research fellow Manu Bhaskaran.

But would such figures remain as high for the rest of the year? “I see businesses becoming much more cautious about expansion and about raising costs as we go further into 2008 and 2009,” said Mr Bhaskaran. “So, I suspect the tight labour market might ease a bit.”

Also, job market figures tend to be a lagging economic indicator, said Deutsche Private Wealth Management Asian strategist Chua Hak Bin: “First-quarter job growth probably reflected the intentions of firms late last year, as hiring plans take some time to execute. Firms probably turned more cautious early this year with the US slowdown and global credit crunch. This may show up more visibly in the second and third quarter, with job growth likely falling off.”

Recent employment surveys conducted with employers reflect this: Manpower Singapore’s report last week stated that employment growth would continue, but at a slower pace.

The overall unemployment rate rose to 2 per cent from 1.7 percent last December - a figure Mr Bhaskaran expects to see climb as companies restructure to become more competitive.

As for the economy, Forecast Singapore economist Vishnu Varathan projected slower growth, with some “buffering effect” from the construction and financial services sector.

“The economy is expected to grow at a fairly resilient 5.5 per cent because we expect to see good investments in Singapore petrochemical plants. And you also have certain sectors of financial services still commited to spending in Singapore. Investments will be part of the story,” he said.

But a moderation in the manufacturing sector, the most vulnerable to a global slowdown, would hurt GDP growth, said Mr Seah. The stronger Sing dollar has also made exports more expensive.

The bigger worry, said economists, is inflation. The MAS survey reported this is likely to rise 6 per cent this year, at the top end of the Government’s forecast of 5 to 6 per cent.

Noting Singapore’s reliance on imports, Mr Varathan will be looking more closely at inflation numbers in neighbouring countries and fuel price hikes. “When there had been specific supply shortages in certain regions, we have always skirted inflation or supply pressure by diversifying the sources of our imports. But now, given that is a global trend and there are fuel hikes in the region, and that most of our food supply comes from the region, we can’t run away from higher prices,” he said.

While the Government expects inflation to ease in the second half, after the impact of the Goods and Services Tax (GST) wears off, economists warn this could be offset by imported inflation. Fortis Bank senior strategist Joseph Tan said: “It’s not going to come down as much as what we previously hoped.”

The spike in nominal wage growth could also potentially feed into domestic inflation, as “higher wage expectations push prices up further”, said Standard Chartered Bank economist Alvin Liew.

Overall unit labour cost (ULC) rose for the eighth consecutive quarter, rising by 8.8 per cent compared to last quarter’s rise of 6 per cent, while labour productivity dipped further by 2.8 per cent.

This, however, did not worry all analysts.

“It is not surprising that ULC should rise in a period of high economic growth and tight labour market as we have experienced,” said Mr Bhaskaran. “The key is the trend over a cycle, so we should not focus just on a few quarters.”

UOB economist Ng Shing Yi said the ULC might improve year-end, when companies stop recruiting at such a feverish pace.

But HSBC economist Robert Prior-Wandesforde warned that higher labour costs created additional pressures. “The implication is that firms either need to raise prices or take a hit on their profit margins … It certainly doesn’t bode that well for underlying inflation pressures in the country.” 

Source : Today - 17 Jun 2008

Here is a story that explains our economic dilemma. 

Two hundred years ago, ships would get wrecked on the submerged rocks surrounding ‘Coconut Island’.

The first time it happened, 10 sailors made it safely to shore. They found a small but beautiful island with 10 large coconut trees.

It wasn’t all paradise since the island was surrounded by sharks. There was also just one thing to eat - coconuts - but it kept them alive.

By luck (good luck?), one of the surviving crew was an economist. He relaxed in the shade of a coconut tree and advised the other sailors on how to work.

When they ran out of food, he suggested picking more coconuts. Sure enough, it increased the food supply.

As the years passed, more and more ships got wrecked on the rocks. The island’s population grew to 100 and then 200 sailors.

With only 10 coconut trees, food became scarce. Everyone was getting hungry. What to do?

Happy ending #1: The economist changed his advice to: ‘Forget coconuts. Instead, imagine lots of delicious food. Now, let’s eat!’

With their active imagination, developed through years of lonely living, the sailors were able to survive on imaginary food and lived happily ever after.

End of story.

Sad ending #2: The economist advised: ‘Use sea shells as money to buy and sell coconuts with one another. Trade first, then eat!’

It seemed to work. Lots of coconuts and sea shells changed hands and it diverted attention from their hunger.

But in a few months, the sailors realised they were still hungry. A few tried swimming to a nearby island but were eaten by sharks.

The others continued trading. The five smartest ended up with all the sea shells AND the coconuts. The other sailors became beach bums, which was fun for a while but they eventually starved. End of story.

The lesson: The world is rapidly running out of coconuts. It is a problem with no solution.

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Are we seeing a bubble or crisis?

1) IT’S A BUBBLE: Michael Masters runs a hedge fund. On 20May, he testified before the US Senate and said speculators are causing high oil prices. I read his testimony and it’s convincing.

US Central Bank chairman Ben Bernanke went one step further. Two weeks ago, he told the graduating class at Harvard that the economy’s problems are not as bad as the stagflation of the 1970s.

Back in 1973, Arab nations got angry with the US and stopped selling it oil. Prices shot up, causing both inflation and recession.

Economists called it ’stagflation’ and, even today, it is the most dreaded economic condition since no one knows how to fix it.

The good news: Most economists believe stagflation is unlikely.

2) IT’S A CRISIS: Commodity prices have shot up a record 50 per cent in the past 12 months. Who is to blame? Is it speculators?

Probably not. Most speculators buy derivative contracts, a type of gambling.

It doesn’t affect how much is actually consumed. That is what determines prices and consumption is up sharply in booming economies like China, India and the Middle East.

Take oil. The world produces 85 million barrels per day and uses exactly thatamount.

But when Ren Xi in China buys his first motorcycle, he nudges demand slightly above 85 million barrels.

Since no more oil is available, someone must consume less. To make that happen, prices rise.

Ren Xi and billions of other consumers - not speculators - are pushing oil prices higher.

Here is the proof: There has never been a speculative price bubble that didn’t burst. This one will too IF it is a bubble. Then, you will see oil prices quickly fall to below US$100 per barrel.

If the demand is real, however, it will continue pushing up the price of food, energy and minerals. It will lead to perpetual shortages and stagflation, making each future generation poorer than the last.

Watch and wait.
 
Source : New Paper - 16 Jun 2008

Private-sector economists are a little less optimistic about Singapore’s economic growth this year than they were three months ago.

According to the latest quarterly survey of 21 professional forecasters by the Monetary Authority of Singapore, they expect full year growth to come in lower at 5.5 per cent.

The new forecast is a slight downgrade from the 5.6 per cent estimate in the last survey in March. However, it is still at the high end of the government’s target of four to six per cent growth.

Song Seng Wun, Regional Economist, CIMB-GK Research, said: “For the full year, we believe that there are certain sectors and industries which may still provide the lift for overall growth. For instance, the construction sector - though faced with rising costs - it’s still probably going to do reasonably well, with double digit growth.

“And within the services sector itself, we have seen some moderation (in) activities, but we are still seeing enough activities going on to give some sort of decent growth.”

For the second quarter alone, the forecast is for growth to come in at 4.7 per cent, better than the 4.4 per cent forecast given in the previous survey.

But inflation is still pushing higher to as much as 7.5 per cent, primarily on the back of rising oil and food prices. Still, it is expected to ease in the third quarter.

David Cohen, Director, Asian Economic Forecasting, said: “We’ll get a little bit of relief in the third quarter, when the year-on-year comparison will be a little more generous because it will have already included the sales tax increase last July, so the year-on-year comparison won’t be inflated anymore.”

For the whole year, inflation is seen hitting six per cent. That’s higher than the forecast of five per cent in the previous survey three months ago.

Some economists said they see enough momentum for the Singapore economy to keep growing, especially since the US slowdown has so far not been as deep as earlier feared. - CNA/vm

Source : Channel NewsAsia - 16 Jun 2008

Just hold out till the end of the year. That’s the advice from Mr Rajesh Malkani (picture), regional head for South-east Asia at Standard Chartered Private Bank.

Street protests may be breaking out across much of Asia over rising costs, particularly fuel.

However, Mr Malkani believes governments are taking the necessary steps to start addressing the situation.

Finance ministers from the world’s leading industrialised powers began two days of talks in Tokyo on Friday, seeking a way to stem soaring food and oil prices that are endangering world economic growth.

The ministers from the Group of Eight (G-8) club of rich nations were expected to discuss how to limit the damage sparked by a doubling of food costs in three years and a series of record oil price highs.

Ahead of that, Mr Malkani shared his thoughts with Bloomberg Television.

On inflation

“There is a frenzy about inflation, but we really think this is nothing but a frenzy. Inflation in Asia is a bigger concern but I think the governments are taking corrective action. We think in 2009 this frenzy won’t exist anymore.”

On investments

“Short term, tactically yes, you can reduce your weighting in equities maybe 10 or 15 per cent. But long term, which other asset class is well positioned to help you outperform inflation.

“It’s still important long term to be in equities, commodities and the more conservative asset classes such as US Treasury bonds.

“Cash is probably the worst asset class to be in during inflationary times.”

On markets:

“In the last couple of months our favourites have been Thailand and Taiwan.” - bloomberg

Source : Weekend Today - 14 June 2008

Inflation in Singapore is expected to peak above 8 per cent in May or June, but the risk of higher prices stifling economic growth is not imminent, a Credit Suisse economist said yesterday.

‘High inflation is negative for growth but it will depend on real income decline,’ the Swiss bank’s emerging markets economics group director Cem Karacadag told BT.

‘In Singapore’s case, real wages are still holding up well,’ he said. ‘I do not think at this moment in time, we are at a level that will stifle growth.’

The government has raised its full-year forecast range for Consumer Price Index twice since the start of this year, with the latest hike taking the forecast to 5-6 per cent, up from 4.5-5.5 per cent after inflation hit a 26-year high of 7.5 per cent in April from a year earlier.

Elsewhere in Asia, food and oil-related items are also driving inflation to near or above double digits.

At a briefing yesterday, Mr Karacadag said that even if oil prices stabilise there is still inflationary upside because the oil price spike in May has not been fully transmitted, food prices are still rising and there are still cost pressures on the economy.

In countries where government controls mute the pass-through of higher oil prices to retail fuel prices, inflationary expectations may worsen in anticipation of discrete price hikes, he added. The recent 25-33 per cent hike in retail fuel prices by the Indonesian government, for instance, could push annual inflation there above 12 per cent in June.

Credit Suisse has raised its inflation forecasts for most Asian countries for 2008, lifting the forecast for Singapore from 4 to 5 per cent. The hike is greatest for Vietnam - from 10.7 to 22.1 per cent.

But with central banks in the region still wrestling with growth risks in the coming quarters, they are unlikely to rapidly appreciate their currencies to combat inflation, Mr Karacadag said. The pass-through impact that exchange rate has on inflation is also generally low.

‘We think that policy responses will depend on the risks to inflationary expectations and the risk of second-round effects,’ Mr Karacadag said. ‘If oil prices keep rising, the risk is that policy falls behind and monetary tightening has to play catch-up later.’

But monetary tightening in Singapore appears to have some impact. The Monetary Authority of Singapore said last month that if not for the appreciation of the Sing dollar - which rose about 11 per cent against the US greenback last year, and a further 4-5 per cent so far this year - Singapore’s 2007 inflation rate would have been 2-2.5 points higher.

‘We expect MAS to maintain the current position and slope of its policy band until the next monetary policy statement in October,’ Mr Karacadag said. ‘If oil prices continue to rise and inflation stay higher for longer time, I do think there is a material possibility of them either steepening the slope or re-centring the band.’

If oil and food prices do not rise further and the second-round effects are avoided, inflation is expected to fall next year and economic growth is expected pick up across Asia ex-Japan, except in Vietnam, he added.

Source : Business Times - 12 Jun 2008