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Inflation forecasts cut but cost worries stay: MAS poll

Thursday, June 12, 2014 - 06:00
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Economy watchers have cut their 2014 inflation forecasts from a quarter ago, even as they kept growth projections intact, a recent survey by the Monetary Authority of Singapore (MAS) found - PHOTO: ST

[SINGAPORE] Economy watchers have cut their 2014 inflation forecasts from a quarter ago, even as they kept growth projections intact, a recent survey by the Monetary Authority of Singapore (MAS) found.

But this speaks more of the lower-than-expected inflation of one per cent in Q1. Economists, in fact, believe that domestic costs will stay high for the rest of the year due to persistent wage pressures.

The 23 forecasters who responded to MAS' quarterly poll in late May had a median inflation forecast for this year of 2.2 per cent, down from 2.8 per cent in the March edition of the survey. The fall brings their median forecast in line with the government's 2014 inflation forecast range of 1.5-2.5 per cent.

DBS economist Irvin Seah - who cut his full-year headline inflation forecast from 3 per cent to 2.1 per cent in April - said that the downgrades were probably to account for the larger-than-anticipated impact from last year's high base of COE (Certificate of Entitlement) premiums, as well as falling imputed rentals.

With greater supply exerting downward pressure on rents in the property market, this year is likely to be the first in many years in which core inflation surpasses headline inflation, Mr Seah said.

After all, the MAS core inflation - which strips out accommodation and private transport prices - is still expected to come in at 2.4 per cent this year, the latest MAS poll showed, as economists stuck to their forecasts from a quarter ago. MAS also said in its "Recent economic development in Singapore" article last week that it expects core inflation to stay elevated and average 2-3 per cent this year.

External price movements should be benign - given that major commodity markets have ample supply buffers and the key countries Singapore imports from face modest inflation. But the domestic cost pressures - especially those stemming from the tight labour market - are likely to be strong and will remain the primary source of inflation, MAS said.

The forecasters' inflation projections were premised upon a median growth forecast of 3.8 per cent for 2014 - unchanged from MAS' previous poll and at the upper end of the official 2-4 per cent forecast.

The Ministry of Trade and Industry (MTI) said late last month it expects this "modest pace" to be supported by gradual improvement in the global economy. But the same labour market tightness that is driving wages and costs higher could also be a drag on growth in labour-intensive sectors, MTI said.

A similar view surfaced in the changes in the economists' forecasts for the various economic sectors. They now expect manufacturing to grow a stronger 5.6 per cent than the 5 per cent forecast a quarter ago. Wholesale and retail trade is also expected to expand by 4.9 per cent this year - up from the median forecast of 3.8 per cent in March.

But they are less optimistic about accommodation and food services - hotels and restaurants which require more manpower. The median growth forecast for that sector fell to 2.1 per cent, from 2.8 per cent in the March edition of the poll.

Barclays economist Leong Wai Ho, whose growth forecast of 3.5 per cent falls below the median from the MAS survey, said: "The external manufacturing side of the economy will pick up speed as the US investment cycle moves into higher gear. However, we are a little concerned with the moderation in services sector growth, particularly in industries that are sentiment sensitive."

Looking beyond this year to the next, the forecasters polled expect the Singapore economy to grow a slightly faster 3.9 per cent in 2015, and expect both headline and core inflation to pick up to 2.5 per cent.