Deja vu? High prices, low growth in 2013

SINGAPORE - Slow growth and high inflation will continue into 2013 as Singapore presses on with restructuring towards productivity-driven growth, economists say.

The 21 professional forecasters polled by the Monetary Authority of Singapore (MAS) in November reported a dimmer economic outlook for both this year and the next.

They now expect the economy to grow a slower 1.5 per cent this year, in line with the official forecast but down from the 2.4 per cent median forecast from the last survey done in August.

That itself had been a downgrade from May's median forecast of 3 per cent.

2012 has been a year of narrow escapes from technical recessions for the Singapore economy.

It remains to be seen if a technical recession - defined as two straight quarters of sequential contraction in GDP - will materialise in Q4.

Meanwhile, inflation defied initial expectations to stay stubbornly high through the second half of the year.

That has prompted economists to expect higher 2012 inflation of 4.7 per cent, up from the last survey's median forecast of 4.4 per cent.

MAS core inflation, which strips out the key inflation drivers of private transport and accommodation costs, is also expected to come in at 2.6 per cent for 2012, up from last survey's 2.5 per cent median forecast.

The official view is that 2012's headline inflation will be slightly above 4.5 per cent and core inflation will be around 2.5 per cent.

Although 2013 is expected to bring improved growth and milder inflation, economists have become less sanguine about Singapore's economic prospects in the new year too.

The MAS survey released yesterday shows economists expect growth to pick up to 2.7 per cent, but that pick-up is smaller than earlier thought.

The median forecast for 2013 growth was 3.9 per cent in the previous quarter's poll.

Construction, expected to grow 8.9 per cent year-on-year in 2012, is also expected to see the strongest sectoral growth of 5.2 per cent next year.

Given that Singapore is boosting infrastructure and ramping up housing supply, Credit Suisse economist Michael Wan says fixed investment will drive growth in 2013.

Other sectors which may do well include tourism-related services, aerospace engineering and biomedicals manufacturing, says Barclays economist Leong Wai Ho.

China, which has displayed stronger signs of recovery recently, could be the catalyst for regional growth too, says OCBC economist Selena Ling, who thinks a return to growth of 8 per cent for China would be a strong confidence booster.

However, "amid a backdrop of sub-par external demand and worsening negative supply shocks from economic restructuring at home, the macro backdrop will remain challenging," says Citi economist Kit Wei Zheng.

There are spillovers from a European recession and US fiscal uncertainties to contend with, as well as increasingly binding labour supply constraints and the stronger Singapore dollar's erosion of competitiveness.

With these, Mr Kit, who holds a below-consensus forecast of 2 per cent growth in 2013, expects risks of a mild technical recession to persist into the first half of next year.

Mr Wan also expects impact on growth as "less productive companies will start to get weeded out in 2013 as restructuring bites".

Expectations for inflation easing next year have been toned down.

Back in August, analysts thought inflation might slow to 3.2 per cent in 2013.

They now think a rate of 3.8 per cent is more likely. But the median forecast for core inflation in 2013 stays at 2.2 per cent.

Apart from the rising costs of housing and cars, underlying inflation is likely to remain sticky too as the tight labour market pushes wages and hence services inflation higher, says Nomura economist Euben Paracuelles.

"The growth-inflation dilemma may not subside so quickly, and the April 2013 monetary policy meeting may remain focused on inflationary pressures, especially with the likelihood that global food prices may resume its ascent next year," says Ms Ling.

In terms of domestic developments to watch out for next year, UOB economist Francis Tan cites fresh measures to tackle labour constraints in a differentiated manner across sectors, and potential property-related measures.

Future measures could target investment demand in non-residential property sectors, says Mr Kit.

Political risk could also drive economic risk, as Japan, Italy, Germany and Malaysia face elections soon and any change in course could cement or derail near-term market sentiment and growth prospects, adds Ms Ling.