Economy set for 2-4% growth this year: MAS

[SINGAPORE] The Republic's economy is on track to grow 2-4 per cent this year while inflation will narrow to 1.5-2 per cent from the earlier forecast of 1.5-2.5 per cent, the Monetary Authority of Singapore (MAS) said yesterday.

But while overall inflation has moderated, underlying price pressures persist. So the forecast for core inflation is unchanged at 2-3 per cent, it said.

The economy has already averaged 3.4 per cent growth in the first half on a year-on-year basis, MAS managing director Ravi Menon said, explaining why full-year growth remains on track.

Last year, the economy grew 3.9 per cent while inflation was 2.4 per cent.

In the second quarter, the Singapore economy performed worse than the market expected - expanding 2.1 per cent compared to a year ago - according to advance estimates of gross domestic product (GDP) released by the Ministry of Trade and Industry (MTI) last week.

This was slower than the 4.7 per cent growth seen in Q1.

Most full-year GDP growth forecasts have now been revised to hover around the 3.5 per cent mark.

Speaking at the MAS annual report 2013/14 press conference yesterday, Mr Menon said the slippage in H1 was due to two factors: extreme US weather, and tightening in China.

"Latest indicators show modest recovery . . . when the two main engines of global growth are functioning, then regional growth will benefit," he said.

In the US, recent data indicates continued economic expansion including modest rise in business spending; this is "important because corporate America is a key driver of growth".

In China, growth should come within the consensus range of 7-7.5 per cent as the government provides targeted support amid ongoing structural reforms.

China's factory activity expanded at its fastest pace in 18 months in July as new orders surged, a preliminary HSBC survey showed yesterday - the latest indication that the economy is picking up as government stimulus measures kick in.

On inflation, MAS and MTI on Wednesday jointly said that headline inflation is "expected to come in at the lower half" of the 1.5-2.5 per cent forecast range.

But the 2014 forecast for core inflation (which strips out accommodation and private road transport costs) is expected to remain at 2-3 per cent.

"This is higher than the historical norm, and is underpinned by the persistence of a tight labour market while improvements in productivity growth take time," MAS said.

MAS will remain vigilant in ensuring that cost pressures are contained over the medium term, and inflation expectations are well anchored, it added.

"Our monetary policy stance has been consistent with that aim," it said.

MAS has maintained a modest and gradual appreciation in the Singapore dollar's nominal effective exchange rate (S$NEER) - the value of the Singapore dollar relative to currencies of its major trading partners and competitors - since April 2010.

MAS said the modest and gradual appreciation path of the local currency since April 2010 has restrained but not fully offset temporary inflationary pressures from economic restructuring.

Elaborating, Mr Menon said core or underlying inflation - which hits lower- income earners harder, and is the focus of MAS monetary policy - has two sources: imported and domestic.

Imported inflation has been flat, he said. "On average, imported inflation has been zero so far this year, compared to the same period last year due to the appreciation of the Singapore dollar, (which) has completely neutralised the impact of foreign prices on domestic prices."

But we know this is not the case when we go to the supermarket, he said.

The prices of non- cooked food items - although imported - have been volatile and generally higher, Mr Menon said.

Papaya prices went up 16 per cent (year-on-year) in H1, while banana prices rose 18 per cent. This was due to the effects of adverse weather in Thailand and Malaysia. At the same time, the prices of oranges went down 7 per cent and tomatoes, 10 per cent.

Looking beyond fruits and vegetables, sugar prices were down, wheat prices were up, while the price of Thai white rice was broadly stable.

The Singdollar appreciation cannot offset these kinds of increases (due to adverse weather conditions), Mr Menon said.

Taking all non-cooked food items together, prices went up 2.8 per cent in the first half of 2014. This is higher than overall inflation, he said. "The greater volatility reflects the periodic shocks in global food prices that have become more frequent in recent years."

But domestic inflationary pressures - mainly from higher wages passing through to consumer prices - remain firm, he said.

"The cost of services is most affected, given their high labour content. As a result, the cost of eating out, education, healthcare and recreation rose at a faster rate compared to overall inflation in the first half of 2014."

Mr Menon expects core inflation to be higher than the historical average of 2 per cent during the period of economic restructuring in the next few years. "The aim of our monetary policy is to keep core inflation expectations anchored at around 2.5 per cent.

"Inflation may exceed this level from time to time but we aim to ensure that it does not do so on a sustained basis," he said.