Asia Pacific Economic Outlook, April 2013

Singapore’s economic growth is weaker than expected. The government has taken strong measures to check two of the major drivers of inflation in the economy: house prices and vehicle prices.


Unexpected economic weakness

Singapore’s economic growth is turning out to be weaker than expected. The economy grew merely 1.3 percent year on year in 2012, avoiding a recession in 2012 because real GDP recorded positive growth in Q4 2012, after two successive declines in the previous quarters. Real GDP unexpectedly contracted in Q1 2013 again, by -0.6 percent relative to the previous quarter’s growth of 1.5 percent. This fall is contrary to the Bloomberg March survey’s expectation of median real GDP expanding at 1.0 percent in Q1 2013.

The fall in real GDP in Q1 2013 was primarily due to the poor performance in the manufacturing sector. This sector contracted by -6.8 percent year on year owing to poor growth in the biomedical manufacturing cluster. The persistent poor demand from the United States and Europe for electronics goods also contributed to the poor performance. The services sector, which accounts for about two-thirds of real GDP, grew by a mere 1 percent, primarily supported by expansion in the finance and insurance and business services sectors.

Monetary policy to maintain status quo on inflationary concerns

Despite unexpected contraction of the economy, the Monetary Authority of Singapore (MAS) has decided to stay away from any monetary stimulus, primarily to fight inflation. This has been in line with the market expectation, given the average year-on-year inflation for 2012 was above 4.5 percent. Singapore uses the exchange rate rather than borrowing costs to conduct its monetary policy and has decided to allow gradual gains in its currency. Strong inflationary pressures—due to high property prices, high demand for cars, and higher wage costs resulting from a strict labor market—have led MAS to maintain its policy of a modest and gradual appreciation of its currency.

The government has taken strong measures to check two of the major drivers of inflation in the economy, namely house and vehicle prices. Singapore has Asia’s second-most expensive housing market, and the home price index has been rising, raising concerns of a housing price bubble. In order to keep home prices from spiraling up, the government has intensified its four-year efforts (started in 2009) to rein in house prices by increasing stamp duty, raising taxes for luxury homeowners and investment properties, and tightening loan-to-value limits. These measures led to a decline in home sales in February, the least since December 2011.

Car prices too play an important role in shaping inflationary expectations in the economy. In the last three years, car prices accounted for about one-fifth to one-half of consumer price index inflation. High demand for cars in 2012 caused car permits, and thus prices, to rise further, contributing about 1 percent to the inflation for the year. To dampen the demand for cars, the government has tightened financial restrictions on motor vehicle loans offered by banks. As a result, the cost of vehicle permits fell in January to the lowest since 2009.

The government has taken strong measures to check two of the major drivers of inflation in the economy, namely house and vehicle prices.

In its monetary policy statement earlier this month, MAS lowered its inflation forecast for 2013 to 3–4 percent, largely due to the recent weaker-than-expected house and car price increases. MAS expects that stricter monetary and government policies will likely result in price correction. Mild import price pressures due to favorable supply conditions in the commodity markets and gradual currency appreciation against major trading partners will likely further anchor inflation and inflation expectations. However, persistent tightness in the labor market, especially strict foreign labor policy and the government’s emphasis on productivity growth over manpower growth, may exert upward pressure on inflation as higher wages would pass through to consumer prices.

A hopeful budget

In the annual budget of 2013 announced in February, the Singapore government emphasized quality and equitable growth through innovation and productivity growth to ensure their sustenance over a long period. The budget has announced programs to support manufacturing and small and medium businesses, and has introduced corporate tax rebates and other incentives to help businesses cope with cost pressures. According to the government’s estimate, the economy is expected to grow by 1–3 percent in 2013. The negative growth in the government consumption expenditure and modest growth in the export revenues due to uncertainty in global demand will likely restrain growth.

Services sector probable solution to sustainable growth

The global economic uncertainty may continue to weigh on the performance in the manufacturing sector, since the sector is highly export oriented. In such a scenario, a likely increase in the domestic demand for the services sector can provide a substantial boost to economic growth. It is expected that private consumption expenditure will increase substantially in the years ahead. This implies that there lies an immense growth potential for wholesale and retail trade as well as financial services. While policy makers have addressed issues to transform the services sector in the recent budget, more focused policies for the sector can improve economic resilience against global economic uncertainties.


Rumki Majumdar

Rumki Majumdar is a manager at Deloitte Research, Deloitte Services LP.

Asia Pacific Economic Outlook, April 2013
Illustrations Jessica McCourt (Cover), Stephanie Dalton Cowan (Singapore)