Fiscal Austerity Weighs on World Economy

Singapore unexpectedly refrained from monetary stimulus, spurring gains in the region's best-performing currency as inflation risks trump worries over a shrinking economy. Gross domestic product fell an annualised 1.5 per cent in the three months through September from the previous quarter, when it expanded a revised 0.2 per cent, the Trade Ministry said. The median estimate of 16 economists in a Bloomberg News survey was for a 1.6 per cent decline. The central bank, which uses the currency to manage inflation, said it will maintain a modest and gradual appreciation of the local dollar.

Singapore joins Asian nations from China to India in limiting monetary stimulus as they guard against price risks even as fiscal austerity in the euro area weighs on the world economy. The island's dollar rose to the strongest level since September 17 after the central bank said inflation will remain elevated for some time even as growth is set to slow to a three-year low in 2012.

"The monetary authority is in a policy quagmire where it has sticky inflation on one hand and on the other, it is dealing with unknown but downside risks from the external economy," said Vishnu Varathan, a Singapore-based economist at Mizuho Corporate Bank. "It's judging that it's too premature to send out dovish signals. Growth will remain sub-par and bumpy, with many blind corners."

Currency gains
The Monetary Authority of Singapore was expected by the majority in a Bloomberg News survey to slow the pace of appreciation in the local dollar to support economic growth. Officials were forecast to curb gains in Singapore's currency by decreasing the slope of its trading band, according to 17 of 23 financial companies surveyed. Five predicted no change, and one projected a shift to a zero slope.

The central bank refrained from cooling currency gains even as the stronger local dollar caps company earnings and faltering global demand hurts exports. Singapore Telecommunications, Southeast Asia's biggest phone company, posted profit that missed analyst estimates in the three months ended June 30 as the strengthening currency hurt earnings growth from its Indonesian and Thai associates.

Policy scope
The International Monetary Fund earlier this week cut its projections for global expansion this year and next, saying it sees "alarmingly high" risks of a steeper slowdown. Policy makers in the Asia-Pacific region have scope to further ease monetary policy to bolster growth in the event the global economy sputters, the IMF said today.

Further easing may be warranted in countries including South Korea and Malaysia should activity fail to pick up as projected, while elevated consumer-price growth in India and Vietnam "may limit the room for policy manoeuver" in those economies, the IMF said in a regional economic report today. Japan may need more easing to accelerate achievement of its one per cent inflation goal, the fund said.

"For the rest of the year, growth could be weighed down by the subdued global economic conditions," the Trade Ministry said. Expansion in transport engineering and construction will help counter the impact of a slowdown in advanced economies on manufacturing and wholesale trade, and the Singapore economy "remains on track" to grow by 1.5 per cent to 2.5 per cent this year, it said.

Indian output
The $240 billion economy expanded 1.3 per cent last quarter from a year earlier, after growing a revised 2.3 per cent the previous three months, the monetary authority said in its advance estimates. The median forecast in a Bloomberg News survey was for a 1.1 per cent gain.

Policy actions have differed among Asian economies as some contend with persistent price pressures, while others seek to bolster growth. India reported in October consumer-price inflation was 9.73 per cent in September. A separate report showed industrial production rose for the first month in three in August from a year earlier.

Euro area industrial output probably shrank in August for the second time in three months, economists predicted. In the US, a report may show producer price gains eased in September, while confidence among US consumers probably dipped this month, economists forecast before the release of the Thomson Reuters/University of Michigan index.

April tightening
Singapore's central bank said in April it would allow faster gains in its currency to damp price pressures. Since then, inflation has eased to a 21-month low of 3.9 per cent, boosting scope to slow the Singapore dollar's appreciation. The currency has soared about 47 per cent against the US dollar in the past decade as the Singaporean economy more than doubled in size.

"The appreciating stance of exchange rate policy since April 2010 has provided some restraint on the build-up of inflationary pressures, which in part reflects supply-side constraints in the economy," the monetary authority said in a statement today. Core prices will face "upward pressure" from higher food and services costs, while overall inflation "will remain elevated for some time," it said.

The monetary authority forecasts consumer-price gains will average 4.0 per cent to 4.5 per cent this year. Low interest rates are likely to persist for some time and will continue to spur demand in the residential property market, pushing up prices beyond sustainable levels, the central bank said on October 5.

Property prices
Singapore said last week it would restrict home-loan tenures in a bid to curb a housing bubble after property prices in the island state rose to a record last quarter.
The country guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and centre of the band. The currency stance is reviewed every April and October.
"Tightness in the labour market will mean wage growth will be supported, if not elevated, and that will be inflationary to some extent," said Enrico Tanuwidjaja, an economist in Singapore at Royal Bank of Scotland Group Plc. who correctly predicted today's decision. "As of now, policy is very, very optimal. Growth is slowing, but we do not see the labor market loosening."

'Modest' pace
The island, located at the southern end of the 600-mile Malacca Strait, is among the first countries in the region to report third-quarter data. The World Bank said this week growth in developing East Asia in 2012 may be the slowest since 2001.

The Singapore government in August trimmed its prediction for 2012 growth to a range of 1.5 per cent to 2.5 per cent, from an earlier forecast for an expansion of as much as 3.0 per cent.

"The global economy is likely to experience an extended period of slow growth," the central bank said today. "Against this backdrop, the Singapore economy should continue to expand but at a modest pace in 2012 and 2013. The labour market should remain tight."

Manufacturing rose 0.7 per cent from a year earlier in the three months ended on September 30, after growing a revised 4.6 per cent in the second quarter. The services industry grew 1.1 per cent last quarter from a year earlier, after climbing a revised 0.9 per cent in the previous three months, while construction expanded 8.6 per cent, compared with a 10.1 per cent increase in the quarter through June.


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