Economy prepares to get a grip on uneven road ahead

SINGAPORE'S economy is expected to put in a patchy performance for the rest of the year as it navigates global headwinds and ongoing domestic restructuring.

Still, the gradually strengthening global outlook should provide a broad-based lift, the Monetary Authority of Singapore (MAS) said in its biannual Macroeconomic Review released yesterday.

The central bank also said inflation will ease further before rising towards the year end and into next year, as oil prices are expected to recover gradually and the domestic labour market will remain tight, keeping wage costs high.

In the wake of two quarters of uneven economic growth, the economy will continue to be buffeted by crosswinds for the rest of the year, the MAS said.

Recovery in the United States, Japan and the euro zone should give a fillip to sectors reliant on these markets, but this will be offset by China's slowdown.

"While the broad macroeconomic outlook is expected to be positive, the extent to which Singapore will benefit from the cyclical uplift will depend on developments in specific markets and industries," the report said.

For instance, the global IT industry is expected to benefit from stronger demand from the developed economies this year. However, ongoing consolidation in the industry might have spillover effects on Singapore's electronics sector as firms restructure their global operations.

An expected recovery in global oil prices in the second half of the year could offer support to oil- related manufacturing segments, which saw a pullback after crude oil prices collapsed late last year.

Still, there will be lingering weakness in segments such as transport engineering, owing to the decline in oil exploration.

While overseas-dependent sectors of the economy face growth headwinds, domestic-oriented industries will be supported by firm demand, the MAS said. For instance, demand for domestic services like education and healthcare will stay healthy as the needs of the local population grow.

Companies will also get some reprieve from the deferment of foreign worker levy increases this year, particularly for the more labour-intensive retail and food and beverage industries. Official forecasts tip economic growth of 2 per cent to 4 per cent this year.

The MAS also said inflation is likely to ease further in the months ahead, amid a global oversupply of crude oil - which is set to dampen costs for both businesses and consumers.

Inflation has been subdued - sometimes even negative - in recent months, largely reflecting the impact of lower global oil prices, enhanced medical subsidies and government policies to cool the property and car markets.

While the tight labour market has pushed up wage costs for firms, the extent to which they are able to pass these costs on to consumers has been limited by moderate economic growth.

These phenomena are likely to continue, the MAS said.

In particular, the retail and holiday travel segments - facing intense competition - will be less able to raise prices.

However, inflation is likely to pick up in the second half of the year as oil prices recover and the effects of Budget measures such as healthcare subsidies dissipate, the central bank said.

At the same time, the labour market will still be tight. It said: "The risk remains that underlying domestic cost pressures in the economy could mount, leading to stronger cost pass-through to consumer prices, especially if economic conditions improve."

chiaym@sph.com.sg

This article was first published on April 29Y, 2015.
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