Price of growth? Forecasters raise GDP estimates, sweat over inflation

Published 10 March 2011
The Business Times
By Teh Shi Ning

The Republic’s economy is now expected to grow a higher 5.7 per cent and witness a sharper price inflation of 4 per cent this year, according to a poll of analysts by the Monetary Authority of Singapore (MAS).

Forecasts for 2011

Forecasts for 2011

The median GDP growth forecast of the 20 economists who responded to the quarterly MAS survey of professional forecasters, released yesterday, was 0.6 of a percentage point above the median forecast three months earlier, while their median inflation forecast rose a sharper 1.1 points.

Both still fall within the current official forecast range of 4-6 per cent GDP growth and 3-4 per cent inflation for the year. But economists that BT spoke to yesterday had divergent views on where the economy’s output and prices are headed.

Much hinges on how ongoing unrest in the Middle East and North Africa and its resultant impact on oil prices pans out, they say. Even barring the most-feared scenario of Saudi Arabia’s oil supply being hit, oil prices could continue to hover at current levels if the situation fails to improve.

In the near-term, this could drive inflation even higher, but a sustained oil supply shock – the key medium-term worry now – could drive growth in the opposite direction, they said.

The recent surge in oil prices has prompted at least one economist, Bank of America Merrill Lynch’s Chua Hak Bin, to lower his forecast for Singapore’s growth this year from 5.8 per cent to 5.5 per cent and up his inflation forecast from 3.2 per cent to 3.9 per cent.

‘The negative impact of an oil price shock on GDP growth is likely to be larger than the positive impact on prices,’ Dr Chua said.

He thinks that there is a 30 per cent probability that Libya’s oil supply could be disrupted for the rest of this year, and with additional supply disruptions oil prices could hit US$125-160 a barrel, a situation which could have ‘a severe impact on Singapore, given our sensitivity to global growth and trade’.

For now, most analysts are holding on to their headline growth predictions, while plotting scenario estimates. OCBC economist Selena Ling thinks that if crude oil prices stay at US$120 or US$150 for at least three months, that could shave 0.5-point or 1.2 points respectively off her current estimate of 5 per cent GDP growth this year.

Barclays Capital Leong Wai Ho, meanwhile, estimates a 0.5-0.7-point dip in his 4 per cent GDP growth forecast, and a 0.4-0.6-point rise in his 3.8 per cent inflation forecast, for every US$10 hike in crude oil prices that lasts a year.

But stressing other drivers, Citi economist Kit Wei Zheng said that there are ‘upside risks’ to his current 2011 GDP growth forecast of 5.5 per cent, possibly to 6.5-7 per cent. This would match the bullishness of DBS economist Irvin Seah’s 7 per cent forecast, just under the maximum forecast of 8 per cent clocked on the MAS survey.

Mr Kit said that the sharp sequential jump in January’s industrial production and indications of robust tourism and banking services growth, coupled with a surge in foreign direct investment inflows, suggest a ‘step up level shift’ in GDP for 2011.

The MAS survey showed that the higher median GDP forecast, compared to three months ago, was indeed due to higher expectations for manufacturing, wholesale and retail trade as well as hotels and restaurants. The forecast for financial services growth slipped slightly to a still- strong 7.4 per cent, but that for non-oil domestic exports growth fell two points to 10 per cent.

Others, such as Dr Chua, however, think that the downside risks to GDP growth emanate not merely from a potential oil price shock, but also tightened foreign worker policies, and to a lesser extent, measures to cool the property market introduced in January.

Economists with higher growth forecasts tended to field higher inflation predictions too. Both Mr Kit and Mr Seah raised their inflation forecast to 4.2 per cent after the inflation rate soared to 5.5 per cent in January.

Mr Kit said that the higher output implied by January’s manufacturing figures suggest that upward pressure on core inflation – which strips out the housing and COE-driven price hikes – could come from tighter resource utilisation.

Noting that inflation is not ‘unique to Singapore’ and by the other Asian economies too, Mr Seah thinks that ‘current inflationary pressure is transient’ and, barring an escalation of the Middle East situation, ought to taper later this year as the government expects.

Most private-sector economists continue to expect the MAS to re-centre the Singapore dollar nominal effective exchange rate band at the upcoming April monetary policy review.

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