Quick takes: Singapore not in 'deflationary spiral' yet

SINGAPORE'S headline inflation continued its contraction for the 18th consecutive month in April, declining 0.5 per cent from a year ago.

Economists polled by Bloomberg had put the expected fall at 0.7 per cent. It was also smaller than the one per cent drop recorded in March.

In a joint release on Monday, the Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) said April's drop in headline inflation was due to the "low base associated with the disbursement of Service & Conservancy Charges (S&CC) rebates in April last year".

MAS core inflation, which excludes the costs of accommodation and private road transport, however, surprised the market and hit a 13-month high of 0.8 per cent last month due to higher services inflation as well as a smaller decline in electricity tariffs.

Here are some economists' comments:

Francis Tan, UOB:

"Headline prices had been contracting for 18 consecutive months, the longest on record, as it broke the previous record of 16 months (Oct 1975 to Jan 1977). However, we hesitate to label the current situation as a "deflationary spiral", as the decline in prices were largely due to administrative measures applied on accommodation and private road transport costs.

"Core inflation remains in the positive growth region, unlike during the 2008/09 financial crisis, where core inflation fell for 9 consecutive months due to a lack of consumer demand as well as corporate/business price-cutting in the aftermath of the global financial crisis. In the current period of slower economic growth, Singapore's core inflation had not contracted at all, but in fact had been edging higher over the past few months.

"That said, global consumer price actions will continue to remain subdued due to the downward pressures on the prices of major commodities as well as manufactured products. Singapore is a price-taker on this front and will continue to see weak inflationary trend in the months ahead. The Monetary Authority of Singapore had also earlier projected lower trends in both the headline and core inflation for 2016.

"We maintain our view that headline inflation will average -0.8 per cent in 2016, while core inflation to average 1.0 per cent in 2016, as we believe that the disinflationary effects of oil from 2015 will start to ease more as we proceed towards the second half of the year.

"We also maintain our USD/SGD forecast of 1.36/USD by end-2016, where the catalyst will come from the divergence in the monetary policies between the US Federal Reserve (where we maintain our forecast of 2 rate hikes of 25bps each from the Fed in 2016) and the MAS (where we forecast no change to current SGD NEER zero appreciation policy in the upcoming October policy meeting)."

Weiwen Ng, ANZ Research:

"For Singapore, low growth is not necessarily deflationary. Weak supply i.e. low productivity is weighing more than sluggish demand on the margin. Hence, higher inflation is more likely than deflation for Singapore.

" Furthermore, MAS' credible commitment to a nominal S$NEER anchor helps to tie down inflation expectations, and hence we expect core inflation to remain sticky in the +0.5 to +1.0% range, notwithstanding a negative headline inflation print."

Selena Ling, OCBC Bank:

"MAS-MTI's April inflation outlook was largely ad verbatim unchanged, with the only minor difference being that 'the increase in core inflation will be mild', rather than 'milder' in the March statement.

"Our view is that headline inflation may attempt to bottom in 2Q16, but stay subdued for the rest of the year due to the continuing drag from disinflationary asset prices and notwithstanding the slight uptick in global crude oil prices."

Irvin Seah, DBS:

"This is the 18th consecutive month of negative inflation, the longest streak on record. The last time inflation was stuck in the red for so long was way back in Sep '75 to Dec '76, when we had sixteen consecutive months of negative inflation.

"The slump in oil prices is certainly one of the key factors for the negative inflation. Policy measures such as the rebates in S&CC to defray costs of living may have played a part too. But more crucially, the slowdown in growth momentum and the impact of earlier macro-prudential measures on housing and car purchases have definitely had a significant impact on the headline number.

"This negative inflation may persist in the coming few months. The excess supply in housing stock and the associated downward pressure on rentals imply that the housing CPI index may continue to fall. In addition, the Land Transport Authority has announced increases in the supply of COE quota, which would mean possible weakness in the private transport cost index.

"Nonetheless, CPI inflation is expected to revert to positive levels from 3Q16 onwards, on account of a lower base effect and possible recovery in oil prices. Overall inflation for the year is projected to register -0.2 per cent."