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Financial markets' impact on real economy fairly limited: government

Full-year GDP growth forecast maintained at 1-3%, even as MTI flags several downside risks

Singapore's growth outlook for the year remains intact and the banking system is not in a crisis, the government said on Wednesday - even as it flagged a slew of risks to economic growth.


SINGAPORE'S growth outlook for the year remains intact and the banking system is not in a crisis, the government said on Wednesday - even as it flagged a slew of risks to economic growth.

Despite a softening in the global economic outlook since the start of the year, the Ministry of Trade and Industry (MTI) maintained its 2016 growth forecast at a modest 1-3 per cent - with the caveat that this is "barring the full materialisation of downside risks".

The recent stockmarket volatility did not have a large bearing on the unchanged growth projection, either, with MTI projecting that the turmoil in financial markets will have only a "fairly limited impact" on the real economy.

Said MTI economics division director Yong Yik Wei at the ministry's quarterly GDP media briefing: "I think what we're more concerned about in terms of looking at the growth forecast is really factors such as the extent of the slowdown in the global economy, what's happening in China, the translation of global growth to external demand for exporters, and of course the impact of oil prices on marine & offshore as well - as opposed to financial markets."

Added Edward Robinson, assistant managing director (economic policy) and chief economist at the Monetary Authority of Singapore (MAS): "The bounce of volatility in financial markets and attendant effects on currency markets have to be anticipated in the context of general uncertainty and heightened risk aversion in financial markets. We're ready to watch that, and in Singapore's case, the fact that the currency is managed against a band ensures that volatility is absorbed within that framework."

Amid market chatter that a banking crisis is fast approaching, another central bank representative took pains to stress the resilience of Singapore's banking system.

MAS deputy managing director Jacqueline Loh said that the banking system here "remains resilient to a range of adverse outcomes", is well-capitalised and diversified.

Its unchanged growth forecast notwithstanding, MTI highlighted a litany of risks to 2016 gross domestic product growth in its Economic Survey of Singapore report.

Globally, these include a greater-than-expected slowdown in China and all its attendant spillover effects, and the potential for regional countries to face sudden and large capital outflows, due to sustained low commodity prices and the start of normalising US monetary conditions.

Domestically, MTI flagged four main drags: weak external demand weighing on exports, lower oil prices crimping prospects for firms in the marine & offshore segment, slower momentum in the construction sector, and labour constraints.

Said MTI permanent secretary Ow Foong Pheng: "While sectors such as finance & insurance and wholesale trade are likely to provide support to growth, the outlook for the manufacturing sector remains weak.

"Even though global growth is expected to improve, the continued slowdown in China, the services-driven nature of growth in the US, as well as the trends of in-sourcing in China and the US, may mean that external demand for our exporters may not see a significant boost this year."

Macroeconomic headwinds aside, MTI said that the economy grew at a slightly slower-than-expected 1.8 per cent year on year in the fourth quarter, as the manufacturing sector contracted more than anticipated and services expanded at a slower pace than initially thought.

This came under the initial flash estimate of 2 per cent growth, and took 2015 growth to 2 per cent - exactly in line with private-sector economists' consensus forecast, and the government's earlier estimate of "close to 2 per cent" expansion.

Still, the full-year figure was lower than the 3.3 per cent growth in 2014.

The wholesale & retail trade and finance & insurance sectors were the key contributors to growth last year, collectively accounting for 1.6 percentage points of overall GDP growth. With the exception of manufacturing (5.2 per cent contraction) and transportation & storage (zero growth), all other sectors grew.

The manufacturing contraction was a reversal from 2014's 2.7 per cent expansion. The fall was broad-based, with all save the chemicals cluster recording output declines.

After seasonal adjustments and on an annualised basis, the economy performed better than earlier thought. It grew 6.2 per cent quarter on quarter - above the flash estimate of a 5.7 per cent expansion and the market's forecast of 4.5 per cent growth, and faster than the 2.3 per cent growth in Q3.

While the majority of private-sector economists continue to expect no change in monetary policy in April, several - including those from Barclays, Credit Suisse, and OCBC Bank - have been flagging the increasing likelihood of an easing stroke.

But even before the central bank's meeting in April, economists such as Citi's Kit Wei Zheng are keenly awaiting Budget Day on March 24 - to gauge the relative importance of fiscal and monetary policies in the overall macroeconomic policy mix.

Noted OCBC's Selena Ling: "The sluggish growth and inflation dynamics continue to slightly push open the policy door for stimulus, be it on the fiscal or monetary front. We expect a more supportive tone to be set at the upcoming Budget 2016, where a netural to a slightly modest deficit position could be in store."

Indeed, Nomura's Euben Paracuelles and Brian Tan think that fiscal policy will have to remain expansionary to support growth this year, with a likely budget deficit of about 0.2 per cent of GDP for fiscal year 2016.

"We expect the foreign worker levy hikes scheduled for this year to be further delayed or even cancelled altogether. Instead, the government will likely place more focus on the SkillsFuture initiative introduced last year to encourage Singaporeans to improve their skills with continuing education and training."