Overheating unlikely, say economists

Singapore's high growth in 2010 is a one-off sharp bounce from 2009 lows

WITH a huge jump in growth already in the bag for the first half of the year, Singapore's economy is all but certain to expand more than 10 per cent for the full year, economists said.

The Government is due to release preliminary estimates of second-quarter expansion on Wednesday and, with them, an expected upgrade of the growth forecast for this year.

The official forecast stands at 7 per cent to 9 per cent growth but economists think Singapore may even outstrip China to become Asia's fastest-growing economy this year, with some tipping an expansion of up to 15 per cent.

With such stellar numbers, the question now is: Will Singapore's economy overheat and experience sky-high inflation?

After all, the last time the economy grew so steeply - annual growth exceeded 13 per cent a year in the late 1960s and early 1970s - soaring prices followed.

Inflation hit a colossal 19.6 per cent in 1973 and went even higher to 22.3 per cent in 1974, according to Department of Statistics figures.

It was the same story in 1980 and 1981. Growth was 10 per cent and 10.7 per cent respectively, and inflation was 8.5 per cent and 8.2 per cent for those years.

Fortunately, Singapore looks to be spared this time round. Although May's inflation came in slightly higher than forecast, at 3.2 per cent, economists believe it will hit no more than 5 per cent by year end, with full-year inflation still coming in within the Government's expected range of 2.5 per cent to 3.5 per cent.

The reason: The extraordinary growth that is expected in Singapore this year is a one-off sharp bounce from the last year's recessionary lows, and will probably not continue past this year, economists say.

'Typically, when one talks of overheating, one would expect continuous or sustained periods of above-trend growth,' said OCBC Bank economist Selena Ling, who is projecting 10.5 per cent growth this year.

'In 2011, we expect headline growth to moderate to 5.5 per cent, which is back to medium-term trend growth range, so it's hardly a case of overheating.'

The rapid pace of economic expansion is also expected to slow in the second half of the year, reining in inflationary pressures, said DBS Bank economist Irvin Seah, who has a growth forecast of 13 per cent this year and 4.5 per cent next year.

'Beneath these rosy numbers lies a 'not-so-pretty' picture,' he said.

'After several quarters of exceptionally strong growth, a 'pullback' can be expected at some point in time. Moreover, the current strong growth pace is partially driven by the pharmaceutical segment and this industry is well known for its volatility - it could swing the other way any time.'

There is also the fact that the extraordinarily high growth numbers have been exaggerated by a low base, due to the sharp plunge in growth numbers in last year's recession, economists said.

And despite the downturn, companies continued to build plants and factories that are due to open this year, adding plenty of spare capacity for the economy to grow without running out of room.

This means that on the one hand, domestic cost pressures - namely wages and property rents - have been fairly contained so far.

On the other hand, imported inflation is also being kept low, partly thanks to a pre-emptive move by the Monetary Authority of Singapore (MAS) to let the currency appreciate in April. The central bank performed an unprecedented double tightening, making a one-off upward shift in the Singapore dollar's value as well as steepening the slope of its future appreciation.

'The double-tightening by MAS in April looks prescient on hindsight, and probably helped to contain imported pricing pressures,' said OCBC's Ms Ling.

But she and other economists added that with global demand still fairly weak, inflationary pressures have been rather tame so far.

' I would downplay the immediate impact from the MAS tightening,' said Mr David Cohen of Action Economics. 'With a few exceptions, inflation has remained relatively subdued around the world.'

In short, as Mr Seah puts it: 'Inflation will rise this year but it will not go out of proportion with the underlying fundamentals of the economy.'

Source: Straits Times, 12 Jul 2010