Singapore’s growth to plummet in 2012

Growth to slow sharply. Growth is already slowing sharply in Singapore – both in terms of exports but also domestically. This is consistent with Singapore’s position as a small open economy in the face of a sharply slowing European economy. We also believe that Singapore’s economy will prove responsive to a recovery in the global trade cycle during 2012. We expect year on year real GDP growth will trough in the first quarter of 2012 with a clearly negative rate of expansion before recovering smartly by year end. For 2012 on average we are below consensus (but in line with government estimates) in forecasting 2.0% real GDP growth, but would emphasise the ‘plunge then recovery’ profile.

Inflation to slow, but structural pressures remain. Slower growth on average in 2012 should also help depress inflation. Headline inflation remains above 5% at the time of writing due to rapid increases in accommodation and private vehicle ownership costs. We expect both these big ticket to show slower price growth as domestic confidence drops. This said, relief from underlying inflation pressures could prove fleeting. We expect the labour market to remain relatively tight and the economy should continue to import overly loose monetary policy from the rest of the world through its managed exchange rate regime. We look for inflation to slow to under 3% in 2012 before accelerating again in 2013.

Fiscal stimulus and easy does it on the SGD – but not too easy. Singapore’s fiscal position and the MAS’ policy to appreciate the exchange rate leave room to ease policy settings in early 2012 if required. The February budget will provide the arena for fiscal policy adjustments while the MAS is next scheduled to decide exchange rate policy in April.

We expect some support for the economy from both monetary and fiscal policy but doubt the easing will be dramatic given the inflation pressures implied by rapid credit expansion and labour supply constraints arising from a tighter immigration policy. This said, we also note that there is room for further currency depreciation within the present policy settings. With only modest exchange rate policy easing in April, and a subsequent smart recovery in the economy we look for the Singapore dollar to be clearly gaining ground against the US dollar by year end.

Risks: global growth, credit cycle. With Singapore’s 2011 general election out of the way, the risks are largely focused on the economy. However, in addition to the risks posed by the global cycle there is the possibility of policy adjustments to counteract excessive credit growth. We expect credit growth, which is currently over 30% on the year, to slow with economic growth. But in the event it does not, policy makers may take action to reduce leverage related risks further down the road.