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MAS macroeconomic review

G-3 recovery will lift S'pore growth, but China slowdown will temper it

Direct economic linkages with China have risen, with its share of S'pore NODX hitting 15.3% in 2014

The growth of the Singapore economy will be supported by a firmer recovery in the G-3 countries but offset by China's slowdown, said the Monetary Authority of Singapore on Tuesday.


THE growth of the Singapore economy will be supported by a firmer recovery in the G-3 countries but offset by China's slowdown, said the Monetary Authority of Singapore on Tuesday.

"A firmer recovery in the G-3 will provide a broad-based boost to the external-oriented sectors of the Singapore economy," said the MAS in its April macroeconomic review.

G-3, which comprises the US, Japan and the eurozone, is forecast to grow 1.9 per cent in 2015, up from 1.3 per cent in 2014. The US is expected to grow 2.9 per cent, Japan one per cent and eurozone 1.5 per cent. In 2014, the US grew 2.4 per cent, Japan had zero growth and eurozone grew 0.9 per cent.

"However, the extent of the uplift will be capped by developments in specific markets and industries," it said.

Uncertainties include a slowdown in China, corporate realignments in the information technology (IT) industry and continued weakness in the oil-related transport engineering sectors due to a downshift in oil and gas exploration. China is slated to grow 6.9 per cent in 2015, down from 7.4 per cent last year.

The domestic-oriented industries will be supported by firm demand and a temporary reprieve from the deferment in foreign worker levy hikes.

"All in, the Singapore economy is on track to post moderate growth of 2-4 per cent this year," it said.

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Following two quarters of uneven growth, the profile of the domestic economy for the rest of the year will be shaped by various crosswinds, the review said.

The recovery in the G3 should provide a fillip to the external-oriented sectors but this will be offset by a slowdown in China.

China's economy could be held back by property market weakness, consolidation within heavy industries and ongoing structural reforms, it said.

"While the Singapore economy remains closely tied to improving final demand in the developed markets, China's weakness will have some impact on domestic GDP growth," it said. "Over the past decade, Singapore's direct economic linkages with China have increased significantly."

China's share in Singapore's domestic exports and re-exports rose from 8.5 per cent and 8.7 per cent in 2005, respectively, to 11.9 per cent and 13.4 per cent in 2014.

"Other industries that increasingly rely on support from Chinese demand include services exports, such as tourism and offshore lending," it said.

In 2014, China accounted for the largest share of non-oil domestic exports (NODX), at 15.3 per cent. The NODX to EU, Japan and the US was 11.1 per cent, 5.5 per cent and 9.5 per cent respectively.

In Q1 2015, NODX to China fell 5.6 per cent from a year ago.

In contrast, NODX to EU and US rose 22.2 per cent and 10.2 per cent respectively. But NODX to Japan was down 11.9 per cent.

Ongoing consolidation in the global IT industry will impact Singapore's electronics sector, MAS said.

The domestic economy is also likely to benefit from the continued expansion in the global IT industry in 2015. Industry analysts have projected growth rates of around 5 per cent for global chip sales, following the 9.9 per cent growth last year.

"Nonetheless, the domestic IT industry will also be affected by important structural changes that are taking place in the global IT landscape," it said.

Notably, there was a step-up in merger and acquisition (M&A) activities in the global semiconductor industry last year. Prominent examples were Infineon, Avago and MediaTek, which made sizeable acquisitions or merged horizontally along the supply chain.

Restructuring has also featured strongly among personal computer (PC) manufacturers, such as Hewlett-Packard and IBM.

"These developments could lead to manpower and cost rationalisations across the IT firms' operations around the world as they seek to reap cost efficiencies from economies of scale. Singapore, being a key node in the regional IT supply chain, is likely to be affected by these corporate realignments," said MAS.

Some strengthening of global oil prices in the latter half of the year could provide support to the oil-related manufacturing segments, which saw a pullback following the collapse in oil prices late last year, it said.

Nevertheless, there will be lingering weakness in segments such as transport engineering, due to the downshift in oil exploration activities.

On inflation, the MAS said that both MAS Core Inflation and CPI-All Items inflation should ease further in Q2-Q3 2015 as the plunge in global oil prices filters through more significantly to domestic prices.

For the whole year, MAS Core Inflation is expected to average 0.5-1.5 per cent in 2015, compared to 1.9 per cent in 2014, while CPI All-Items inflation could fall to -0.5-0.5 per cent in 2015, from 1.0 per cent in 2014.

While CPI All-Items inflation could be negative on a year-on-year basis for some consecutive months, this largely reflects falling car prices, housing rentals, and costs of oil-related items, which together constitute around a third of the CPI basket, it said. "More than half of the items in the CPI basket will continue to see price increases."