Singapore economy to grow just below 3%: IMF

Here are 4 key proposals to boost economy.

The International Monetary Fund said on Monday that Singapore’s GDP growth is expected to weaken in 2012, even as inflation remains elevated.

“The strong global growth impulse seen earlier this year has given way to tepid world demand. Meanwhile, Singapore’s low unemployment rate and negative real interest rates are expected to sustain domestic demand. Under the benign global baseline scenario, growth is forecast to soften this year to just below 3 percent, with a moderate increase in 2013,” it said.

“Nonetheless, inflation is expected to remain under pressure from the tight labor market and lagged effects of higher prices for vehicle permits and real estate on consumer prices,” it added.

IMF warned that external downside risks are looming large and given Singapore’s pronounced trade and financial openness, the impact of further euro area turmoil, abrupt fiscal tightening in the United States, and/or a severe slowdown in China would be substantial. However, IMF said that a more contained event could induce safe-haven inflows into Singapore, cushioning the impact on growth, but possibly at the cost of reigniting domestic credit growth and real estate prices.

Here are what IMF suggests for Singapore:

1. Prolong tighter limits on foreign work inflows should the need arise.

The government’s policies to increase labor productivity could have important macroeconomic effects. Slower foreign worker inflows will boost real wages and, if complemented with well˗targeted incentives for technology and skills upgrading, should with time support productivity growth. The authorities also see these policies as essential to alleviate overcrowding.

In the near term, the strategy is expected to reduce potential growth and increase frictional unemployment. It will also push up inflation and contribute to a permanently more appreciated real exchange rate and narrower current account surplus. If prices and unemployment rise more sharply than expected, consideration could be given to lengthening the phase˗in of the tighter limits on foreign worker inflows. Enhanced and targeted social safety nets could improve the efficiency of job search and reduce the social costs of the transition.

2. Accommodative monetary policy

Policymakers confront the challenge of containing inflation expectations amid a testing environment. The tightening of monetary policy in April 2012 and the FY 2012 Budget’s moderately-restrictive stance are appropriate under the baseline scenario to keep the output gap contained as potential growth moderates.

However, inflation should be permitted to rise temporarily to accommodate the increase in relative prices of labor-intensive products resulting from the tighter labor market conditions. To prevent inflation expectations from rising, other sources of inflation—including from transport costs, credit growth and asset prices—should be forcefully tackled, including through continued recourse to macroprudential tools. Consideration could also be given to further absorbing liquidity.

Singapore has ample policy space and large buffers to mitigate the effects a steeper global growth slowdown or financial turmoil. As in 2008−09, the response should focus on preserving the private sector’s economic and financial infrastructure to facilitate a rapid recovery when demand subsequently resumes, while providing an adequate social safety net.

3. Outward expansion encouraged despite European deleveraging

Singapore’s dynamic financial sector has important strengths, but extensive cross˗border linkages and large exposure to domestic real property pose risks. Sizable deleveraging by European banks from Singapore since mid˗2011 has not created visible strains, but close monitoring of funding conditions at foreign bank branches should continue. Rapid outward expansion by domestic banks into the region entails currency and duration risk, and banks should continue to build up and lengthen their on˗balance sheet U.S. dollar funding. Real estate poses a concentration risk.

4. More property measures to curb prices

While an escalating series of macroprudential measures, combined with deteriorating regional sentiment, halted the rise in house prices in late 2011, a prolonged period of high unemployment or fall in real wages could impair credit quality. Additional targeted macroprudential measures are called for if property prices reaccelerate.

According to IMF, from a multilateral perspective, Singapore’s external position is stronger than warranted by fundamentals. In addition to appropriate adjustments in other countries, achieving a more balanced external position in Singapore calls for raising private and public spending and a more even distribution of consumption across generations. Rapid population aging, tighter restrictions on foreign worker inflows, and the government’s plan to increase social and infrastructure spending over the medium term will help support this rebalancing, it said.