Bumpy recovery and muted inflation likely

MAS adds to the voices that don't see a sharp turnaround

(SINGAPORE) Rather than experiencing a sharp, decisive recovery, the Singapore economy will likely see slow and uneven growth, says the Monetary Authority of Singapore (MAS).

It also expects consumer price inflation to trend down in the second half of the year and come in between minus 0.5 and plus 0.5 per cent for 2009.

While the economy, going by early estimates, has picked up strongly in the second quarter, with the sequential figures turning positive after four negative quarters, 'we should not expect a decisive, straight-line rebound,' MAS managing director Heng Swee Keat said yesterday.

Recovery will likely be slow and uneven, 'with ups and downs'.

The Q2 rebound has to be seen in the context of the sharp retraction in economic activity in the preceding two quarters, and businesses have started to rebuild inventories to levels that are more sustainable with underlying demand, he told a media conference on the MAS annual report.

Also, much still hinges on the strength of final demand in the major markets - and here, there remain stresses in the global financial system and job markets continue to weaken, Mr Heng added.

The 20.4 per cent quarter-on-quarter rebound in Q2 (the year-on-year pace is still a negative 3.7 per cent) has prompted many economists to declare that the economy is 'technically' out of recession - though others, such as the IDEAGlobal team, recognise that 'one good quarter does not make a recovery'.

There should be evidence of consistent, sustained recovery across the economy before recession is deemed to be over.

In any case, 'in tandem with the weak demand and easing domestic costs, consumer price increases are expected to be muted', Mr Heng said.

Domestic costs such as wages and rentals have slid 'quite a bit', and will likely stay down in the second half. For the first five months of 2009, the inflation rate here averaged 1.1 per cent.

But, with the recent hike in global oil prices, MAS has effectively raised the inflation projection, from the previous range of minus one to zero per cent, to the new forecast centred on zero inflation.

Still, despite the sharp economic rebound in Q2, GDP growth remains below trend and inflationary pressures are still muted, said Mr Heng.

Its current monetary policy stance remains appropriate to support the economic recovery and ensure price stability, he added.

Last October, MAS shifted, for the first time since April 2004, to a neutral exchange rate policy stance. The policy band was then re-centred at the prevailing weaker level in April this year, with the neutral stance intact.

The next monetary policy review, due every six months, will be in October.

Back in April, MAS had said that the Singapore economy could be in for an extended period of below-trend growth.

Source: Business Times, 17 July 2009