Singapore Sees Below-Potential Growth as Price Pressures Persist

Singapore’s economy will grow at below-potential levels for a second year in 2013 even as a tight labor market and rising costs of goods and services add to inflationary pressures, the central bank said.

The island’s pace of growth “slowed discernibly” in the past two quarters, and external demand is expected to remain “tepid and volatile” next year, the Monetary Authority of Singapore said in a twice-yearly review today. Gross domestic product may increase 1.5 percent to 2.5 percent this year, it said, reiterating a previous forecast. It didn’t give a prediction for 2013 growth.

“While the global economy should be relatively less volatile next year, its growth momentum is unlikely to pick up significantly as the deleveraging process in the advanced economies will be protracted,” the monetary authority said. “As such, Singapore could see its second consecutive year of below-potential growth in 2013.”

The central bank, which uses its exchange rate to manage inflation, unexpectedly held off from slowing the currency’s appreciation this month even after the economy contracted last quarter. The International Monetary Fund this month cut its projections for global expansion this year and next, saying it sees “alarmingly high” risks of a steeper slowdown.

Singapore’s GDP fell an annualized 1.5 percent in the three months through September from the previous quarter, the Trade Ministry said Oct. 12. The city-state avoided falling into a technical recession after second-quarter GDP data was revised to show the economy grew 0.2 percent.

Car Permits

The central bank said earlier this month it will maintain a modest and gradual appreciation of the local dollar, joining Asian nations from China to Malaysia in limiting monetary stimulus as they guard against price risks even as fiscal austerity in the euro area weighs on the world economy.

Rising costs of car permits, higher housing rentals and a labor market that is near full employment may fuel price pressures even as imported inflation will “generally be benign” amid an appreciating currency, the central bank said.

Consumer price gains will average more than 4.5 percent in 2012 and will be in a 3.5 percent to 4.5 percent range next year, it predicted, maintaining previously announced forecasts.

Singapore, located at the southern end of the 600-mile (965-kilometer) Malacca Strait and home to one of the world’s busiest container ports, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts the financial services and tourism industries to reduce reliance on exports.

“While external demand is expected to remain tepid and volatile, the ramp-up in supply capacity on the domestic front should support growth,” the central bank said in the Macroeconomic Review today.

Job Creation

The government has made it more expensive for companies to hire overseas workers by raising levies, increasing salary thresholds and requiring better educational qualifications for some categories of foreigners.

“The labor market is expected to remain tight in the coming quarters as a result of continued strong job creation in the domestic-oriented sectors and constraints on the supply of both local and foreign workers,” the monetary authority said. “Overall job creation will continue at a firm pace” in the second half of 2012 and into 2013, it said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net