Weak H1 sees MAS, MTI reviewing 2015 forecast

Singapore

THE Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) are reviewing the 2015 growth forecast for the economy, taking into account the weaker output in the first half of the year as well as supporting factors in the second half.

MAS managing director Ravi Menon said this on Tuesday at the MAS Annual Report 2014/15 media briefing. He said MAS is closely monitoring three key risks in the external environment. The first is Greece, where the situation remains highly uncertain. The second is China, where downside risk has increased, and the third, the region, where financial conditions could tighten sharply as the US Federal Reserve hikes interest rates.

"The economy has clearly lost some momentum in Q2," said Mr Menon. Real gross domestic product (GDP) contracted by 4.6 per cent in the second quarter on a seasonally adjusted, quarter-on-quarter annualised basis, the MTI said last week in its advance estimates release.

The pullback was broad-based; all three sectors - manufacturing, services and construction - posted sequential declines over the previous quarter for the first time since the third quarter of 2001.

In year-on-year terms, Q2 GDP disappointed as well, growing just 1.7 per cent, due to a contraction in the manufacturing sector. This was slower than the 2.8 per cent growth in Q1 and below the market's expectation of a 2.4 per cent expansion; it was also the slowest pace of growth since Q3 2012.

Still, growth momentum is not expected to deteriorate further in the second half, Mr Menon said.

In its annual report, MAS said that Singapore's growth of 2-4 per cent is on track. "The global economy is expected to grow modestly in 2015, underpinned by a firmer expansion in the advanced economies," said MAS.

In the United States, the Federal Reserve is moving closer towards the process of monetary policy normalisation amid an improving economic outlook. The eurozone economy is seeing gradual improvement, while economic activity in Japan is recovering as the drag from the consumption-tax hike dissipates.

China's growth is likely to continue moderating and the rest of Asia should benefit from improvements in exports and lower oil prices, MAS said.

"Against this backdrop, the Singapore economy is expected to expand at a moderate pace of 2-4 per cent this year, in line with its medium-term potential of 3 per cent on average," it said.

MAS also said there is no change to inflation forecasts.

Both the CPI-All Items inflation and MAS Core Inflation are expected to be lower in 2015 compared to last year due to lower oil prices. Core inflation excludes accommodation and private car transport.

Headline inflation and core inflation are projected to average -0.5 to 0.5 per cent, and 0.5 to 1.5 per cent respectively. Mr Menon said that he expects headline inflation to come in at the lower half of the forecast range in 2015, but should pick up in 2016. Core inflation is also expected to be in the lower half of the forecast range.

Singapore's headline inflation in May remained in negative territory for the seventh straight month.

But Mr Menon stressed that Singapore is not facing a deflation as the "price decline is neither persistent nor pervasive".

It is not persistent because temporary factors are keeping inflation muted but underlying cost pressures persist, he said.

More fundamentally, the labour market remains tight and the resident unemployment rate is near a 17-year low, he said. Singapore's unemployment rate in Q1 was just 1.8 per cent.

Another reason why Singapore is not facing a deflation is that most items in the CPI (consumer price index) basket continue to experience "modest price increases", he said. This includes prices of everyday items like food and public transport. The cost of restaurant food is up 2.5 per cent while hawker food prices are up 2.2 per cent compared to a year ago, he said.

Mr Menon said MAS is "very comfortable" with its policy settings and that they are appropriate for ensuring medium-term price stability.

He could not say, though, what MAS will decide at its scheduled monetary policy review in October as "we are data dependent".

MAS has two scheduled policy announcements - in April and in October - and surprised the market in January when it reduced the slope of the S$NEER or Singapore dollar nominal effective exchange rate.

The January off-cycle decision was due to the significant change in the 2015 inflation outlook, Mr Menon said. Oil prices had fallen to US$47 a barrel in January from US$84 a barrel in October and were likely to stay low for at least a year, he said.

On the property cooling measures, he said it is "still premature" to consider reviewing them. "Property prices have softened somewhat, but like I said last year, in the context of the price increase that occurred - 60 per cent over three years - the softening we've seen is really not all that much," he said.

Consultants now expect a lower range for developer sales of private homes this year - 6,000-7,500, following the release of June numbers by the Urban Redevelopment Authority last week. This would be about one-third of the record of over 22,000 homes sold in 2012.

Developers sold 42 per cent fewer private homes, or 375, in June, down from 643 in May and taking the tally for the first half to 3,496 - a drop of almost 21 per cent from a year ago.

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