Head, Treasury Research & Strategy
Member of OCBC Wealth Panel
Singapore’s 1Q2017 GDP expanded by 2.5 per cent year-on-year (-1.9 per cent quarter-on-quarter seasonally adjusted annual rate or SAAR), close to our forecast of 2.4 per cent year-on-year (-1.7 per cent quarter-on-quarter SAAR), and a moderation from the 2.9 year-on-year growth (+12.3 quarter-on-quarter SAAR) seen in 4Q2016.
Manufacturing outperformed (+6.6 per cent year-on-year), followed by services (+1.5 per cent year-on-year) whereas construction was the laggard (-1.1 per cent year-on-year) in 1Q17. In quarter-on-quarter sequential terms, both manufacturing and services sectors moderated 6.6 per cent and 2.2 per cent from the strong 4Q16 momentum. Notably, manufacturing was supported mainly by the electronics and precision engineering clusters which mitigated the weakness in biomedical manufacturing, transport engineering and general manufacturing clusters. Meanwhile, the services growth was aided by the wholesale and retail trade and transportation and storage sectors on the back of a continued export recovery.
The Monetary Authority of Singapore (MAS) left its monetary policy stance unchanged at a neutral policy for an extended period after its policy meeting on April, with the band width and center also static, citing that the current band provides flexibility for inflation weakness.
The official growth and inflation forecasts were left unchanged at 1-3 per cent and 0.5-1.5 per cent year-on-year respectively, with core inflation remaining at 1-2 per cent as well. While the Singapore dollar nominal effective exchange rate (S$NEER) had appreciated from below the mid-point of its policy band to the upper half of the band following the October 2016 meeting, this was attributed partly to broad-based U.S. dollar weakness.
MAS rhetoric noted that the global outlook has improved slightly since its October 2016 Monetary Policy Statement but Singapore’s growth at 1-3 per cent this year will not be markedly different from 2 per cent in 2016. For inflation, energy-related components are the key drivers of the pick-up in pricing power, coupled with some administrative price adjustments (namely car park charges and household refuse collection fees from December 2016 and January 2017, as well as upcoming hikes in water prices and service and conservancy charges) which will contribute to a temporary increase in the consumer price index, but demand-driven inflationary pressures will be restrained, and core inflation is expected to trend towards but average slightly below 2 per cent over the medium-term.
In our view, the extended period for monetary policy will extend to at least October 2017. Our house forecast remains at 2 per cent for Singapore’s GDP growth and 1 per cent and 1.6 per cent for headline and core inflation forecasts respectively.
The green shoots remain less than broad-based and inflationary pressures are mainly arising from higher oil prices and domestic policy-driven pricing pressures. Despite the healthy manufacturing clip, the rest of the manufacturing sector is tipped to “remain patchy” apart from the domestic semiconductor and precision engineering industries. Note construction saw its third straight quarter of year-on-year contraction due to weakness in private sector construction activities and another contraction in 2Q17 looks plausible. For services, healthcare and education services should still see resilient domestic demand, but discretionary spending will be restrained by the softening labour market conditions. Housing rents are also tipped to continue to decline this year, and the lackluster domestic environment will deter businesses from fully passing on higher costs to consumers.
Domestic Singapore dollar interest rates, especially at the front end of the curve, remains reluctant to follow the London Interbank Offered Rate (LIBOR) higher, notwithstanding the U.S. Federal Reserve’s gradual policy normalisation trajectory.
With the SGD NEER bearing the brunt of the adjustments from the unwinding of the Trump trade as far as the U.S. dollar is concerned, and the MAS maintaining its neutral policy stance for an extended period, the potential for Singapore Interbank Offered Rate (SIBOR) and SWAP Offer Rate (SOR) to stay subdued for longer remains a risk at this juncture.
While we anticipate that the U.S. Federal Reserve may deliver at least another two 25 basis point rate hikes this year, our end-2017 forecast for the 3-month SIBOR and SOR had been revised lower to 1.25 per cent and 1.35 per cent respectively.
Overall, we also expect U.S. President Trump’s comments about the U.S. dollar being too strong to override any short-term dovishness imparted by the MAS’ monetary policy statement which kept the “extended period” reference in relation to its neutral policy stance, and continue to keep the exchange rate between the U.S. dollar and Singapore dollar (USDSGD) suppressed.
The USDSGD could test lower towards the S$1.38 region in 2Q17 amid the ongoing Trump trade unwinding following the failure of the American Health Care Act bill to pass the U.S. House of Representatives which eroded market confidence in Trump’s ability to implement significant tax reforms and aggressive fiscal stimulus. Our end-2017 USDSGD forecast remains at the S$1.42 handle by end of the year.
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