Growth looks on track despite hike in inflation forecast

http://www.businesstimes.com.sg/sub/...80526,00.html?

Published May 24, 2008

Growth looks on track despite hike in inflation forecast

Govt raises 2008 inflation estimate to 5-6%

By ANNA TEO


(SINGAPORE) Inflation has hit 7.5 per cent and may average 6 per cent for the year, but economists believe the rising prices will not derail Singapore's growth.

The government yesterday raised its forecast for 2008 consumer price inflation by half-a-point to 5-6 per cent, following a spike in the rate to 7.5 per cent in April - a 26-year high.

The revised forecast by the Ministry of Trade and Industry (MTI) and the Monetary Authority of Singapore (MAS) overshadowed the release of first-quarter GDP growth: at 6.7 per cent, Q1 growth is below market consensus and below the early official flash estimate of 7.2 per cent, though up from the preceding 2007 Q4's 5.4 per cent.

MTI is maintaining the official GDP growth forecast of 4-6 per cent for the year, noting that the external slowdown is panning out pretty much as expected.

'The critical uncertainty remains the US economy,' MTI second permanent secretary Ravi Menon said at a news conference yesterday. 'We're looking at a recession or near-recession scenario that is not unlike the 2001 and 1991 experiences - may be close to about three quarters of weak or negative growth followed by steady recovery.'

The bottom line is: the US is already in a significant slowdown. While the worst seems over for US financial markets, a recurrence of Bear Stearns-type 'financial accidents' cannot be ruled out, MTI says. Another bout of financial turmoil would deepen and prolong the US economic slump.

Singapore faces both growth and inflation risks, 'though probably the balance of risks has shifted towards inflation', Mr Menon said yesterday.

'Going forward, there remains a high degree of uncertainty on global food and energy prices,' he added. 'There could be some moderation in food prices towards the end of the year. On the flip side, unforeseen supply disruptions could just as well trigger a second round of increases in food prices.'

MTI's latest forecasts see oil prices averaging US$110 per barrel over the year, up from US$94 in March and US$87 in February.

Over the next 2-3 months, Singapore's inflation rate is expected to remain high - probably around current levels - but should start to ease in the second half of the year as the impact of the higher Goods and Services Tax (GST) wears off. At the same time, underlying inflation momentum appears to have plateaued, MTI notes.

And Singapore's exchange rate policy - which Mr Menon described as 'the main policy tool right now in our arsenal' to fight inflation - will have a moderating effect. If not for the appreciation of the Sing dollar - which rose about 11 per cent against the US greenback last year, and a further 4-5 per cent so far this year - Singapore's 2007 inflation rate would have been 2-2.5 points higher, MAS deputy managing director Ong Chong Tee told reporters yesterday.

Economists said the official GDP growth forecast remains intact, even as growth estimates of non-oil domestic exports have been pared to just 2-4 per cent.

They reckon, however, that inflation could exceed the official estimates - and warn of a wage and business cost spiral. Overall unit labour costs surged 8.8 per cent in Q1, and manufacturing unit business costs rose 3.3 per cent.

According to estimates by HSBC's Asian economists, if the CPI continues to rise just 0.6 per cent every month between May and December in seasonally-adjusted terms, inflation would average 7.5 per cent for the year.


http://www.businesstimes.com.sg/mnt/...S_GROWTH24.jpg