SINGAPORE (Sept 29): HSBC Global Research foresees a gradual improvement in Singapore’s domestic economy after the Monetary Authority of Singapore’s (MAS) April 2018 meeting, which is expected to result in a policy shift.

In HSBC’s Global Economics report for Q4 2017, economists Joseph Incalcaterra and Jingyang Chen note that the city state’s domestic conditions remain relatively sluggish, as improvement in exports thus far have not fully passed through to the domestic economy.

This is particularly so for private consumption owing to a large stock of household debt, decelerating wage growth, and declining housing prices.

The economists nonetheless believe green shoots for the domestic economy are beginning to emerge, starting with an upswing in the manufacturing sector since 1Q, with semiconductor growth averaging 60% on-year since the start of 2017.

“We expect production to remain strong to the year-end, but forecast some deceleration in 2018 following the robust tech cycle this year, which will drag down overall gross domestic product (GDP) growth next year,” they add.

While the finance and insurance sector continues to serve as a growth driver, Incalcaterra and Chen believe the soft and uneven growth across the services sector is a reflection of subdued private consumption in recent quarters which has led to a two-speed economy in Singapore.

Regardless, they expect this to gradually improve in 2018 on the incipient and gradual recovery in the housing market.

The economists are projecting for growth in Singapore to adjust to a lower trend of 2-2.5% GDP growth in the 2-2.5% range, while demand-pull price pressures remain tempered by slackening labour markets and a slow downtrend in wages.

Despite their forecast that core inflation growth will decelerate next year to 2.3%, Incalcaterra and Chen are expecting MAS to adopt a marginally positive slope at less than the standard setting of the 2% appreciation in the April 2018 meeting – a reflection of structurally weaker growth potential and the Singapore government’s policy priority of maintaining manufacturing competitiveness, in their view. 

Additionally, they opine that MAS’ forward guidance to maintain its neutral policy for an “extended period” may be further tweaked in the October Monetary Policy Statement (MPS).

“We expect core CPI inflation to remain around 1.6-1.7% over the next few quarters, slightly below the long-run average. As a result, despite the cyclical improvement in the economy, we do not expect the MAS to rush to reinstate a positive slope, particularly given the currently-weak consumption and private investment trend. We continue to expect the restoration of a gradual positive slope only at the April 2018 meeting,” elaborate the economists.

“True, the MAS is in no rush to reverse the macro-prudential push in recent years, but new supply has already peaked and there is likely pent-up demand, as evidenced by recent property launches (foreign participation has not increased). More broadly, the advance indicator (6-month lead) for services industries has finally turned positive, reflecting optimism,” they add.