Business Times - 20 Feb 2010

THE Republic's economic growth story in 2010 shall be 'a tale of two halves' as global recovery strengthens in the first but major risks loom over the second, the Ministry of Trade and Industry (MTI) says.

Echoing this view, market economists think yesterday's 1.5 percentage-point upgrade of the official gross domestic product (GDP) growth forecast - to between 4.5 and 6.5 per cent - makes it 'more realistic'. Most expect 2010's recovery to be gradual and uneven, and though the most optimistic see as much as 7 per cent growth this year, the new forecast is more in line with private-sector consensus of about 6 per cent growth.

MTI said its upgrade follows 'considerable improvement in the external environment' in the past three months and 'increased strength in near-term growth momentum'.

Previous quarters' 'green shoots will grow stronger in the first half' as global trade flows and industrial production pick up, but weak US private demand, sovereign debt risks and monetary policy tightening are among 'clouds on the horizon' in the second half of 2010, permanent secretary Ravi Menon said.

Hence the expectation of a strong performance in growth in H1, with pullback in growth in the second half. GDP figures released yesterday show that the economy shrank 2 per cent in 2009, above flash estimates put out last month. The Q4 numbers - 4 per cent growth year-on-year (y-o-y) and 2.8 per cent contraction quarter-on-quarter were also better than expected. The latest quarterly report card also marks a return to the black, with positive y-o-y growth across all sectors.

This recovery should extend until June, with strong contribution expected from manufacturing and trade-related sectors. The electronics cluster will benefit from higher global IT spending and inventory restocking, while new facilities will lift biomedical and chemicals production, Mr Menon said.

Tourism-related sectors will also benefit from the integrated resorts' opening though actual impact on GDP will not be large, he added. Yesterday's 2009 Economic Survey of Singapore report noted that though the latest recession had a less severe impact on visitor arrivals than the Asian financial crisis had, it hit hotel revenues harder as room rates fell from recent years' highs.

On the external front, Mr Menon pointed to the US economy's stronger and earlier-than-expected rebound - which inventory accumulation and fiscal stimulus should sustain for at least the first half - and a strong China-led recovery in Asia, as key positives. In fact, non-oil domestic exports to Greater China have recovered most strongly thus far, while Singapore's NODX to the G-3 economies remain weak, the report said.

Improved global electronic demand and higher oil prices are expected to lift NODX by 10 to 12 per cent this year, reversing 2009's 11 per cent plunge. Overall trade is now expected to grow 9 to 11 per cent, up from the previous 7 to 9 per cent growth forecast, International Enterprise Singapore said yesterday. This is subject to the same growth risks which MTI thinks cast a shadow over the H2 outlook and how sustainable the recovery is.

Mr Menon thinks that sluggish US private demand - especially if it fails to pick up - could have the largest spillover effects. But other downside risks include rising sovereign debt risks in European economies such as Greece and Spain - possibly 'the new sub-prime' - and the dampening effect of monetary policy tightening to fend off asset price inflation in Asia.

The Monetary Authority of Singapore (MAS) considers its current policy stance 'appropriate at this juncture'. Economists now think it less likely that MAS will tighten monetary policy at the coming April review, given the caution expressed yesterday and a benign inflation outlook.

The official inflation forecast for 2010 was lowered to 2 to 3 per cent yesterday, after a rebasing of the consumer price index.

Asked about the bank deposit guarantee scheme introduced late in 2008 and due to last till the end of this year, deputy managing director Ong Chong Tee said MAS is in talks with other regional central banks about exit strategies and that these would be 'carefully calibrated'.

Other than productivity boosting initiatives in line with Economic Strategies Committee recommendations, measures supporting growth are expected to feature in the 2010 Budget on Monday.