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Briefs: US Fed signals one rate cut this year; Singapore economy expected to grow by 2.7% y-o-y in 2Q2024

The Edge Singapore
The Edge Singapore • 9 min read
Briefs: US Fed signals one rate cut this year; Singapore economy expected to grow by 2.7% y-o-y in 2Q2024
US Federal Reserve chair Jerome Powell. Photo: Bloomberg
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Quoteworthy: "So many companies are playing games and trying to take advantage of investors, so we need short sellers more than ever." –— Jim Chanos, president and founder of Kynikos Associates, known for short-selling

Fed signals one rate cut this year but keeps door open to two

US Federal Reserve officials dialled back their expectations for interest-rate cuts this year, though chair Jerome Powell kept the door open for more as he emphasised the new forecasts represented a conservative approach.

According to their median estimate, policymakers’ updated economic projections, published after a two-day policy meeting in Washington on June 12, showed they expected to lower borrowing costs only once in 2024 instead of the previous three reductions. 

They also raised their forecasts for inflation, even after better data on consumer prices published earlier in the day provided cause for optimism.

“There’s still the possibility of two rate cuts this year, starting as soon as September, but they need the data to comply and kind of bolster their confidence,” said Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co. “Being conservative, it’s understandable. They are erring on the side of conservatism. I think the door’s still wide open.”

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The US central bank’s policy-setting Federal Open Market Committee decided to hold its benchmark rate steady in a range of 5.25% to 5.5%, the highest level in more than two decades, for a seventh straight meeting. According to futures, Investors see two rate cuts this year, with better-than-even odds of an initial reduction in September.

Earlier in the day, the Bureau of Labor Statistics published figures showing a key measure of underlying inflation cooled for a second straight month in May, following elevated readings to begin the year.

Powell called the numbers “encouraging” and hinted that the new consumer price index figures may not be fully reflected in policymakers’ latest quarterly projections. 

See also: Wag the dog

Although the committee was briefed on them, he said “most people generally don’t” update their projections when such data arrive in the middle of policy meetings. Officials marked their forecast for inflation, excluding food and energy, to 2.8% in 2024 from 2.6%, implying little additional progress over the year from current levels.

“Chair Powell used the press conference to diminish the importance of these projections and made a point of indicating that ‘most’ officials likely did not incorporate today’s softer-than-expected inflation reading in their economic projections and ‘dots,’ rendering them stale,” Citigroup economists led by Andrew Hollenhorst said in a note to clients, referring to the “dot plot” of rate projections.

In determining the appropriate timing for rate cuts, the Fed is grappling with uncertainty over the impact of tight monetary policy on the economy. Job growth and consumer spending have been surprisingly resilient despite high borrowing costs. Inflation has also cooled substantially following a sharp acceleration during the pandemic, though it remains above the Fed’s 2% target.

The Fed chair said officials are carefully considering both upside and downside risks. He also emphasised a split within the committee: The “dot plot” showed seven officials expected one rate cut this year, while eight saw two and four expected none.

“Powell leaned into the close split between the one-cut median and the two-cut mode, whereas last time when the March median implied three cuts — with many for fewer — he was quite happy to leave it be,” said Derek Tang, an economist with LH Meyer/Monetary Policy Analytics.

Officials also lifted their estimates of where rates will settle in the longer term to 2.8%, from 2.6% at the March gathering, according to the median projection. The increase, following a slight bump in March, has been fuelled in part by the recent resilience of the economy.

“People have gradually been writing it up because I just think people are coming to the view that rates are less likely to go down to their pre-pandemic levels,” Powell said.

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Some officials, including Dallas Fed President Lorie Logan, have said higher borrowing costs may not be slowing the economy as much as previously thought. Others, like New York Fed President John Williams, maintain policy is well-positioned to bring inflation down to the Fed’s goal.

“The question of whether it’s sufficiently restrictive is going to be one we know over time,” Powell said. “The evidence is pretty clear that policy is restrictive and is having the effects that we would hope for.” — Bloomberg

Singapore economy expected to grow by 2.7% y-o-y in 2Q2024

The Singapore economy is expected to grow by 2.7% y-o-y in 2Q2024, according to market watchers polled by the Monetary Authority of Singapore (MAS). The estimate comes after Singapore’s GDP expanded by 2.7% y-o-y in 1Q2024, slightly above the median forecast of 2.6%.

The MAS survey of professional forecasters for June was released on June 12. Out of the 26 economists and analysts surveyed, the report captures the perspectives of the 20 who responded.

In 2024, Singapore’s GDP is still expected to expand by 2.4%, unchanged from the previous survey. However, in this survey, market watchers now expect the country’s GDP growth to be led by the finance and insurance sector, with a 5.1% y-o-y growth from 3.4%. The previous survey pegged the manufacturing sector as leading Singapore’s GDP growth with a 4% y-o-y growth. In this survey, the manufacturing sector is expected to expand by 1.6% y-o-y. Expectations for Singapore’s non-oil domestic exports (NODX) for the year also dipped to 4% from 6%.

According to the mean probability distribution, the Singapore economy is most likely to grow by 2% to 2.4% this year, with an average probability of 35%. This is followed closely by the 2.5% to 2.9% forecast range, with a probability of 30%. In the previous survey, the respondents similarly assigned the highest probability of growth outturns between 2% and 2.4%.

In the 2Q2024, market watchers expect CPI-All items (headline inflation) and the Monetary Authority of Singapore (MAS) core inflation to come in at 2.8% and 3%, respectively. This comes after headline inflation stood at 3% in 1Q2024, lower than the respondents’ forecast of 3.6% in the previous survey. Core inflation for the first quarter also stood slightly lower than forecast at 3.3% compared to the estimate of 3.4% previously.

In 2024, the median forecast for headline inflation is 2.8%, down from 3.1% in the March survey. The median forecast for core inflation remains unchanged at 3%.

The respondents assigned the highest probability to the 2.5% to 2.9% range for headline inflation compared to 3% to 3.4% in the March survey. For core inflation, the highest probability was assigned to the 3% to 3.4% range, compared to the previous survey, where the highest probabilities were almost equally spread between the probability ranges of 2.5% to 2.9% and 3% to 3.4%. The unemployment rate is expected to be 2.1% by the end of 2024.

In 2025, the respondents expect Singapore’s GDP to expand by 2.5% y-o-y. Their forecasts of the most likely outcome for growth fall between 2.5% and 2.9%, unchanged from the previous survey. The average probability assigned to the range is 34%, up slightly from 33%.

Singapore’s headline and core inflation are expected to be 2.1% and 2%, respectively, in 2025. The respondents assigned the highest probability to the 2% to 2.4% range for both readings.

Meanwhile, concerns over geopolitical tensions were frequently mentioned as the primary downside risk to the domestic outlook, whereas expectations of stronger growth from China were commonly highlighted as the main upside risk to Singapore’s outlook.

Most respondents polled do not anticipate changes to the slope, width and level of the Singapore dollar nominal effective exchange rate (S$NEER) policy band in the upcoming July and October reviews.

About 11% of respondents anticipate a reduction in the slope of the policy band in the July review, while 6% expect to see the same in October. About 6% of respondents predicted a lowering of the level at which the S$NEER policy band is centred in the October review.  — Felicia Tan

World Bank raises global growth forecast on strong US expansion

The World Bank raised its forecast for global growth this year on strong US expansion while warning that climate change, wars and high debt will hurt the poorer countries where most of the world’s population lives.

According to the Global Economic Prospects report released on June 11, the bank boosted its projection to 2.6% from a 2.4% forecast in January. The Washington-based anti-poverty lender kept its 2025 forecast unchanged at 2.7%.

Most of the improvement stems from the World Bank upgrading the US growth outlook to 2.5% from a previous estimate of 1.6%. However, countries in Sub-Saharan Africa, the Middle East and North Africa saw their estimates cut.

“The good news is that the global economy is stabilising and doing so faster than we expected back in January and in good part, this is because of the unexpected strength of the US economy,” said Indermit Gill, the bank’s chief economist. But the growth path now is lower than before the coronavirus pandemic and “for the smallest and poorest economies, things are not looking good either in terms of stability or growth,” Gill said.

The global inflation rate is expected to drop to 3.5% this year and 2.9% in 2025 but to fall more slowly than projected in January. That means that many central banks will likely remain cautious about cutting interest rates, which will remain high by pre-pandemic standards, averaging about 4% from 2025 to 2026.

Gill flagged the challenges developing economies face in attracting private investment, reducing public debt, improving education, health, and basic infrastructure, and dealing with conflict and climate shocks. He said the 75 nations that qualify for interest-free lending from the World Bank’s International Development Association will need international support.

The bank also highlighted the risks that countries face from weak global trade. While trade growth will pick up a bit this year from a standstill last year, the World Bank forecasts that 2024 will cap the worst half-decade of growth for trade since the 1990s.

“The trade outlook remains lacklustre compared to recent decades, partly reflecting a proliferation of trade-restrictive measures and elevated trade policy uncertainty,” the World Bank said. — Bloomberg

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