Wealth Insights (September 2017)

Singapore’s Economic Outlook - Implications For Monetary Policy And Interest Rates

The Singapore economy grew by 2.9 per cent year-on-year (yoy) in 2Q17, better than the flash estimate of 2.5 per cent yoy.

The main contributing factor was the services sector which expanded by a faster 2.4 per cent (previously estimated at 1.7 per cent yoy).

The uptick in services momentum was driven by finance and insurance (3.8 per cent yoy, which is the fastest since 3Q15) and transport and storage (3.5 per cent yoy on the back of improved container throughput and sea cargo handled).

Even the business services and wholesale industries (especially for machinery, equipment & supplies) and the retail trade industries saw improved momentum. Only the accommodation & food services industries was the laggard declining 2.2 per cent yoy which marked the third straight quarter of contraction amid sluggish restaurant sales volumes. Manufacturing and construction growth for 2Q were little changed from the earlier flash estimates at a growth of 8 per cent yoy and a decline of 5.7 per cent yoy respectively.

The Ministry of Trade and Industry (MTI) also narrowed the 2017 growth forecast from 1-3 per cent to 2-3 per cent. While MTI retained its familiar downside risks of anti-globalisation sentiments, faster-than-expected policy normalisation by the U.S. Federal Reserve (Fed), and a steeper-than-intended pullback in China, it also noted that these risks have eased compared to a quarter ago.

Moreover, the MTI’s statements sounded more upbeat, with manufacturing likely to continue to support the second half outlook. Elsewhere, the externally-oriented services sector should benefit from the global trade pick-up while the domestic-oriented services sector should remain resilient. Only the construction sector is tipped to remain lacklustre due to the double whammy of weak private and public sector activities.

International Enterprise (IE) Singapore also narrowed its 2017 non-oil domestic export (NODX) forecast from 4-6 per cent to 5-6 per cent. The 2017 total trade forecast was also narrowed upwards to 6-7 per cent. IE Singapore cited the upgrades in growth forecasts for key trading partners as reasons for the more positive trade outlook. NODX rose 2.7 per cent yoy in 2Q17 which is a moderation from the 15.3 per cent yoy expansion seen in 1Q17, on increased electronics product shipments which outweighed the decline in non-electronics.

The Monetary Authority of Singapore (MAS) is unlikely to adjust its monetary policy settings at its October Monetary Policy Statement (MPS). MAS’s Deputy Managing Director, Jacqueline Loh said “the GDP forecast range for this year has been narrowed to 2-3 per cent, which is within the planning parameters of the MAS’s April 2017 monetary policy decision” and “accordingly, the monetary policy stance remains as announced in April”. Currently, the monetary policy setting is for a neutral stance for an extended period. Moreover the domestic headline and core inflation prints at 0.7 per cent and 1.5 per cent yoy for 1H17 are also within the official parameters.

So the crux for any tweaks at the October MPS would boil down to the 2018 growth and inflation outlooks. While global growth prospects are gaining momentum, there is still considerable uncertainty about the inflation story given that crude oil prices remain subdued and the domestic labour market conditions are not red-hot.

Concerns over the recent pick-up in interest in the domestic private property market could also be nipped by macro-prudential measures if needed. In addition, the Fed is likely to embark on unwinding its balance sheet in September, so some caution may also be warranted in case of any mini-market tantrums.

Our full-year 2017 economic growth forecast for Singapore remains at 2.5 per cent, as the reacceleration of the services sector may be partially offset by a moderation in the manufacturing momentum due to less favourable base effects.
Moreover, the on-going geopolitical uncertainties, especially heightened North Korean tensions, may be a drag on market confidence if it lingers on. Our end-2017 forecast for the 3-month Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR) are 1.25 per cent and 0.97 per cent respectively.