Cost pressures cast a shadow over 2011

Published 18 February 2011
The Business Times
By Anna Teo

Inflation could hit 5-6% in first few months; growth estimated at 4-6% after clocking 14.5% in 2010

With the economy still growing faster than its trend pace, emerging cost pressures, not GDP growth, will be the key macroeconomic risks this year, says the Ministry of Trade and Industry (MTI).

Singapore's 2010 Report CardThe official forecast for 2011 growth remains 4-6 per cent, down from 2010’s super-normal 14.5 per cent rebound. But inflation is now expected to average 3-4 per cent for the year – up from earlier estimates of 2-3 per cent, and above 2010’s 2.8 per cent rate.

Higher car prices following the surge in vehicle permit premiums in recent months, as well as a spike in home rentals of late and higher food prices, will push up headline inflation to 5-6 per cent in the first few months of the year, said officials yesterday at a briefing on the 2010 Economic Survey of Singapore.

The rise in the consumer price index (CPI) will likely peak at about 6 per cent by the end of the first quarter, according to a Monetary Authority of Singapore (MAS) economist.

Thereafter, the headline rate is expected to ease, especially in the second half of the year as base effects wear off.

But, with a tight labour market – unemployment has dipped to 2.2 per cent and jobs go unfilled, especially in the financial, hotel and restaurant sectors – strong wage pressures will continue to bear on the CPI in 2011, said MTI permanent secretary Ravi Menon.

‘The key macroeconomic challenge this year will not be growth but dealing with emerging cost pressures,’ he said, referring to inflationary pressures at home and across Asia as a source of downside risks to what’s otherwise a highly positive economic outlook.

Still, the cost situation will not be as acute or dire as in 2007-2008, when the job market was much tighter and a construction boom prevailed, and the economy was at risk of overheating, Mr Menon said.

The CPI inflation rate hit a monthly high of 7.5 per cent through Q2 of 2008, and averaged 6.6 per cent for that year.

Indeed, MAS’s core inflation indicator – seen as a ‘more stable’ measure of underlying inflation as it excludes the more volatile and ‘policy-driven’ items, private road transport and housing – points to a 2-3 per cent uptick in prices this year.

For 2010, MAS core inflation came in at 1.5 per cent, compared to the 2.8 per cent headline rate.

In any case, even as some build-up of cost pressures is expected this year, MTI and MAS remain fairly sanguine about the inflationary risks.

Further sharp spikes in car prices will be capped by sluggish demand, and the rise in residential rentals should ease in the second half of the year as more supply comes onstream, said Ong Chong Tee, MAS deputy managing director.

Mr Ong also said there is no need for now to revise the monetary policy stance effected last October, with the next review due in April. Private-sector economists – many of whom raised their forecasts of Singapore’s 2011 GDP growth and inflation yesterday – believe another round of monetary tightening is on the cards.

Meanwhile, the projected GDP growth this year is still a ‘healthy’ 4-6 per cent that’s above the economy’s medium-term trend range of 3-5 per cent, MTI’s Mr Menon pointed out.

‘In fact, there is some upside potential’ to the 4-6 per cent forecast, he added, citing upcoming new electronics and biomedical science facilities that should add to manufacturing output. And ‘sentiment-sensitive’ financial activities could also fare better than envisaged, he said.

The latest data also show that the 2009 recession was shallower than earlier estimated – the economy shrank 0.8 per cent, and not 1.3 per cent, that year.

This renders the economy’s 14.5 per cent rebound in 2010 ‘even more remarkable’, Mr Menon said.

Along with the GDP surge, labour productivity also recorded a 10.7 per cent ‘cyclical rebound’ in 2010 after two negative years.

‘This year, we’ll see a more moderate rate of productivity growth,’ said Mr Menon. ‘The real test is from this year onwards.’

While 2011 will be, ‘in some sense, a reversion to norm’, it will be, on the whole, a good year for growth, he added, with ‘need for some vigilance’.

Private-sector economists agree. DBS economist Irvin Seah expects the economy to grow 7 per cent in 2011, driven by the services sector.

The economic backdrop sets the stage, the economists say, for what should be ‘a potentially generous’, if mildly expansionary, FY2011 Budget to be unveiled this afternoon.

Economic infrastructure upgrading in the form of new roads, schools, hospitals and MRT extensions to boost public construction demand, as well as financial aid to lower-income households to mitigate the rising inflation and income disparity, are expected.

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