Inflation, global slowdown biggest load on economy in 2013: analysts

Inflation, global slowdown biggest load on economy in 2013: analysts
By Linette Lim | Posted: 17 December 2012 1704 hrs
     
SINGAPORE: Global slowdown aside, inflation may be the biggest load on the Singapore economy next year.

And some of that pressure is self-made as the economy endures yet another go at restructuring.

Logistics, financial services and high-tech manufacturing are just some of the industries that make up Singapore's competitive external economy, which does most of its business with the rest of the world and pays top dollar for skilled labour.

Contrast that with the less efficient domestic economy, which makes use of low-cost foreign manpower to do jobs in retail, construction and cleaning.

That is Singapore's two-tiered economy, which is currently undergoing a major restructuring.

OCBC Bank's head of treasury research and strategy, Selena Ling, said: "With a very tight labour market and the indications that the foreign manpower constraints are going to remain in order to promote productivity growth, it looks like labour costs and some of the other cost elements, such as rentals, logistics, are going to remain fairly tight.

"I think we may not see as much relief on the inflation front in the near term, so this actually puts the April 2013 monetary policy review very likely to be on an unchanged footing at this juncture."

Policies that curb the use of foreign workers have contributed to higher wages.

At around 4-4.5 percent, headline inflation is more than double the historical average, boosted by other domestic factors like accommodation costs and car prices.

At the same time, turning off the flow of cheap manpower will continue to crimp growth -- something that is of no help to exports which are curtailed by weak global demand.

Nomura Singapore's executive director and Southeast Asia economist, Euben Paracuelles, said: "We have a relatively weak backdrop. In terms of how we see Europe, for example, it will still be a bigger recession in terms of our forecast and therefore, Europe still being a significant trading partner of Singapore, will pose a drag.

"Domestically, I think the government needs to manage this transition relatively well. There will be some tightening in domestic policies; labour policies will also be very tight, and that could lead to some weakness in overall investment spending."

Economists said it is unlikely that the Singapore government's stand on restructuring will change, despite the current macroeconomic headwinds.

This means that people will have to accept a lower level of economic growth now, for more sustainable growth in the future.

Growth is expected to come in at 1.5 percent this year, and between 1 and 3 percent in 2013, according to Singapore's Ministry of Trade and Industry.

RBS' vice president of economics research, Enrico Tanuwidjaja, said: "Singapore should be allowed to ride the volatility of slower growth, because externally, it is weak.

"Of course, we'll be sub-optimal, achieving growth below 3 percent this year and next. But after that, with a more diversified economy, not just from manufacturing but also from services, I'm pretty sure that growth will eventually edge higher."

Edge higher it might, but the restructuring currently underway may mean Singapore will have to adapt to a slower, long-term economic growth path.

- CNA/lp

- wong chee tat :)