Short-term outlook lacklustre: MAS
THE economy is facing uncertainty in the short term as the outlook for Singapore's key trading partners remains cloudy, according to the Monetary Authority of Singapore (MAS) yesterday.
Despite the lacklustre outlook, the central bank said its decision this month to slightly reduce the Singdollar's rate of appreciation was appropriate, adding that a more drastic move would have been unwarranted given that the economy has not fallen off a cliff.
The central bank also noted in its biannual macroeconomic review out yesterday that global growth prospects have softened over the past six months.
While the United States has been showing some signs of recovery, its growth has been largely consumption-driven, and mainly met by domestic supply.
This means any boost to Singapore from a resurgent US could be more muted than before.
Slowing growth in Singapore's major regional trading partners - China, Indonesia and Malaysia - will drag down expansion in the short term.
These three economies account for a third of Singapore's goods exports and are also significant sources of demand for services such as tourism.
These factors will contribute towards a modest growth rate of between 2 and 2.5 per cent for Singapore this year, MAS said. The economy is expected to expand at a broadly similar pace next year.
In the longer term, however, Singapore should be able to ride on the region's push into the high-tech goods and services space.
In particular, Asean neighbours such as Vietnam and Cambodia are expected to become more deeply integrated into global supply chains.
This should benefit Singapore's exporters and wholesalers, MAS noted in the review, which documents its assessment of macroeconomic developments affecting the economy.
For instance, semiconductor exporters have received a significant boost from the surge in Vietnam's tech trade.
Rising incomes in these economies will also raise the purchasing power of households, "which bodes well for Singapore re-exporters plugged into the consumption goods space".
The central bank also elaborated on the factors behind its monetary policy decision earlier this month, when it upset market forecasts by choosing to only "slightly" flatten the path of the Singdollar's appreciation.
There had been expectations that MAS would opt for more aggressive currency weakening given tepid growth and low inflation.
However, "an even stronger policy easing... was clearly unwarranted, as the Singapore economy was neither experiencing an outright retraction in economic activity nor widespread price declines", the central bank said yesterday.
It added that this policy stance will help maintain price stability in the medium term, particularly since core inflation is expected to rise gradually over the course of 2016 towards its historical average as the drag from lower oil prices wears off.
Economists said further monetary policy easing cannot be ruled out even though MAS has strongly hinted that it is not on the cards.
"Anything is possible and there are still significant uncertainties in the global economy," said DBS economist Irvin Seah.
"It remains to be seen how drastic China's deceleration is, and the US Federal Reserve's decision about when to hike interest rates is still a question mark," he added.
UOB economist Francis Tan noted that productivity growth remains a key concern in the longer term. "Our economic growth is a lot more volatile than larger countries that can depend on domestic consumption, so we'll still see swings. But what's more important is for the long-term growth trajectory to continue moving upwards."