Singapore may escape technical recession but downside risks remain

Stagflation haunts Singapore economy and the Monetary Authority of Singapore (MAS) may have to unwind policy stance, says an economist.

According to Ramkishen S. Rajan, an economist from George Mason University, USA, stagflation – or growth slowdown and rising inflation - may be a significant policy challenge for Singapore as it will be for other emerging Asian economies for the remainder of 2011 and next year.

“I am not sure about a technical recession after the -6.5% growth q-o-q in q2 but I suspect given the sharp and sudden decline we may not see that sharp a decline in q3 especially given that q2 disappointment was partly due to the volatile bio sector,” he said.

Singapore’s economy shrank for the first time in three quarters when gross domestic product fell 7.8% year-on-year in the second quarter from the previous three months, when it climbed a revised 27.2%.

The second-quarter drop was largely due to declines in highly volatile pharmaceutical production and by a high base effect when compared to strong growth early last year.

Mr. Rajan,who is also a visiting professor at Lee Kwan Yew School, National University Singapore, however noted that even if Singapore staves off a technical recession, there will be a considerable softening of economic activity in the second half of the year.

“Slowdown in US and Eurozone economies as well as China and India will invariably impact Singapore economy as external demand softens. Growing concerns about global outlook and Euro imply greater demand for USD and gold (given Swiss France quasi intervention) implying continued downward pressure in Singapore dollar against the greenback in the near term,” he says.

“Indeed, growth year-on-year on export growth on average last three months (June-August) only about 1 to 1.5%,” he adds.

The challenge of slower economic activity for the remainder of the year is even made complicated by rising inflation.

Singapore's annual inflation accelerated to 5.7% year-on-year in August, the fastest pace since October 2008.

The MAS  is holding a policy meeting next month and Mr. Rajan said that moderate easing (or atleast unwinding of hitherto tightening policy) of monetary/exchange rate policy may help in avoiding technical recession.

The MAS maintained last month its policy stance as that announced in the April 2011 Monetary Policy Statement – when it tightened monetary policy as Singapore posted a sharp acceleration in economic growth for the first quarter.

The country’s current policy stance is to allow a gradual appreciation of Singapore dollar against a basket of currencies to reduce price pressures.

That stance however according to some experts has attracted even more safe-haven inflows into the AAA-rated Southeast Asian city-state, threatening to magnify existing price pressures and thereby hurting local banks by forcing them to curb their already low loan margins.

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