Singapore Economy Losing Momentum

Singapore’s economy lost some of its momentum in Q1 2017 as it contracted an annualized 1.9% from the previous three months, preliminary data from the government showed earlier this week. On a year-over-year basis, the real gross domestic product in Singapore rose 2.5% in Q1-2017, largely in line with consensus expectations.

GDP figures are often volatile in Singapore and a breakdown of the Q1 real GDP data showed manufacturing activity contracted 6.6% in Q1 following a very strong Q4 in which manufacturing grew 39.8%. Construction output grew 5.8% in Q1, but is down 1.1% year-on-year. The services-producing sector, on the other hand, contracted 2.2% on the quarter but is up 1.5% year-on-year, econotimes reported.

Growth in Singapore remains well below the supercharged growth rates experienced before the Great Recession. The slowdown in global trade has weighed upon trade-reliant Singapore’s economy which derives 60% of its income from final sales to foreign households, businesses and governments. Growth in global trade has been weak over the past few years and a return to the robust growth rates registered during the past two decades do not look likely anytime soon.

The nation’s population dynamics also present a long-term headwind going forward. Working age population in Singapore is forecasted to peak in the next few years and then begin to decline. Hence, the productive capacity of the economy will not grow as fast as it has over the past few decades. Indeed, the International Monetary Fund forecasts that real GDP growth in Singapore will average 2.5% per annum between 2017 and 2021.

The CPI inflation rate in Singapore at present is less than 1% and sluggish economic growth is likely to keep inflationary pressures benign for a foreseeable future.

Meanwhile, Singapore’s central bank left monetary policy unchanged after the economy contracted in the first quarter, saying the neutral stance is appropriate for an extended period of time.

“We do not explicitly forecast the policy actions of the Monetary Authority of Singapore, but the MAS probably will not sanction exchange rate appreciation anytime soon if, as seems likely, real GDP growth remains lackluster and inflation stays low. Indeed, our currency strategy team looks for the US dollar to trend slowly higher versus its Singaporean counterpart in coming quarters,” said Wells Fargo Economics in a report.

USD/SGD has been extending downside after hitting multi-year peaks of 1.454 in January 2017, levels unseen since Aug 2009. The pair was trading at 1.397 on Friday.