Singapore’s Expansion Reduces Pressure to Ease Policy: Economy

Singapore’s economy unexpectedly expanded last quarter as services and construction strengthened, reducing pressure on the central bank to ease monetary policy.

Gross domestic product rose an annualized 1.8 percent in the three months through March from the previous quarter, when it grew 3.3 percent, the Trade Ministry said in a statement today, revising an earlier estimate for a 1.4 percent contraction last quarter. The median in a Bloomberg News survey was for a 1.2 percent decline.

While a global economic slowdown has prompted central banks from Australia to South Korea to mount another wave of interest-rate cuts in recent weeks, inflationary pressures in parts of Asia mean the next move by some nations may be to tighten monetary policy. A Bloomberg survey showed China is more likely to raise borrowing costs than cut them in the coming year, Indonesia signaled a “tightening bias” and Singapore has stuck to its stance of allowing currency appreciation.

“There’s very little slack in most Asian economies so as the recovery starts to take hold during the second half of the year, this slack would very quickly evaporate and that would begin to build up underlying inflation pressures,” said Leif Eskesen, chief economist for India and Southeast Asia at HSBC Holdings Plc in Singapore. “We do expect some central bank action on that front.”

As Premier Li Keqiang grapples with credit expansion and price gains, eight of 15 analysts surveyed by Bloomberg News this month project an increase in China’s benchmark deposit rate by the end of June 2014, compared with two who see a reduction.

Tightening Bias

Bank Indonesia Deputy Governor Perry Warjiyo said in an interview yesterday that the central bank is leaning toward tightening monetary policy as a plan to raise fuel prices shifts the focus to stability from growth. Vietnam central bank Deputy Governor Nguyen Dong Tien said this week that officials will find it “difficult” to cut rates further this year.

Economic growth in developing Asia is estimated by the International Monetary Fund to be almost six times faster than advanced nations this year, and increasing investor appetite for risk has spurred capital inflows into the region.

The Singapore dollar has gained about 0.8 percent in the past year. It fell 0.5 percent to S$1.2686 against the U.S. dollar as of 1:25 p.m. local time.

Asian stocks fell for a second day. Japan’s Topix index slid about 6 percent, the most since the aftermath of the March 2011 tsunami and nuclear disaster, as financial companies plunged amid rising bond yields.

Gradual Gains

The Monetary Authority of Singapore maintained a policy of allowing gradual gains in its currency last month as inflationary pressures curbed scope for monetary stimulus. The stance remains appropriate, central bank Deputy Managing Director Ong Chong Tee told reporters today.

Consumer-price growth slowed in April to 1.5 percent from 3.5 percent in March on smaller gains in housing and transportation costs, the Statistics Department said today. Still, central bank Managing Director Ravi Menon said this week inflation is expected to be around 1 percentage point higher this decade compared to the last.

GDP expanded 0.2 percent last quarter from a year earlier, better than the 0.6 percent contraction estimated previously, today’s report showed. The Trade Ministry reiterated its forecast for a 1 percent-to-3 percent expansion in 2013. The government today kept its forecast for non-oil domestic exports to climb 2 percent to 4 percent this year.

‘Improve Gradually’

“Although Singapore’s economic growth eased in the first quarter, it is expected to improve gradually over the course of the year,” the Trade Ministry said today. “Externally-oriented sectors are expected to pick up in tandem with the gradual recovery in external demand, while construction and key services sectors such as finance & insurance and business services will continue to provide support to growth.”

Singapore’s industrial output rebounded more than economists estimated in April, a separate report showed. Elsewhere in the region, a purchasing managers’ index showed China’s manufacturing is contracting for the first time in seven months in May. Thai exports probably rose at a faster pace in April from a year earlier, while Taiwan may say industrial production declined for a third month, separate surveys showed.

In Europe, a composite PMI reading may show euro-area services and manufacturing output contracted for a 16th month in May. The U.K. will release first-quarter GDP numbers. A U.S. government report may show fewer Americans filed for jobless benefits last week, while a separate release may say new home sales rose at a faster pace last month, economists predict.

Rising Wages

Singapore’s unemployment rate is near a five-year low amid a labor shortage as the government tightens curbs on the hiring of foreign workers. Wages will grow at a faster pace in 2013, the central bank said in a report last month.

“The tight labor market is the key binding constraint to the central bank easing,” said Michael Wan, an economist at Credit Suisse Group AG in Singapore. “Even if we do see inflation and growth coming down, what they’re worried about is that the tight labor market will drive up wages and wage expectations, which could lead to runaway inflation.”

Singapore’s central bank uses the exchange rate rather than borrowing costs to conduct monetary policy, adjusting the pace of appreciation or depreciation against an undisclosed trade-weighted band of currencies.

This approach to monetary policy is still valid and a switch to a regime of managing interest rates will be highly destabilizing, Menon said in a May 21 speech.

Manufacturing shrank 6.8 percent from a year earlier in the three months ended March 31, compared with an April estimate of a 6.5 percent contraction. The services industry grew 2.7 percent last quarter from a year earlier, while construction expanded 7.3 percent.

“Services and construction will be the main drivers of growth,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. “With a stronger-than-expected recovery in the U.S., there’s a strong likelihood that manufacturing could surprise on the upside.”

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