While China seems to be back on the upturn and the slump in Japan looks like its slowing (leaving prices falling though), there’s bad news from Singapore where the economy is heading for a very nasty fall this year.
The island state says its recession will be deeper than previously expected, prompting the central bank to adjust the band within which the currency is managed to help the nation exit its worst economic slowdown on record.
The move was effectively a small devaluation: estimated at around 1.7% which was immediately eaten up in part by a 0.8% rise in the market value of the currency.
The country’s central bank said in its latest forecasts yesterday that the economy could contract by 6% to 9% this year, more than January’s forecast of a 5% fall.
That’s the third reduction in the government’s forecast in the past four-and-a-half months.
"The Singapore economy recorded a broad-based contraction of 16.4% on a quarter-on-quarter seasonally adjusted annualised basis in Q4 2008," the Monetary Authority of Singapore (the country’s central bank) said yesterday in a statement.
"Amidst the unprecedented collapse in global demand, trade-related activities such as manufacturing, wholesale trade and transport services decelerated sharply, while the financial sector was adversely affected by the turmoil in international financial markets.
"According to the Advance Estimates released by the Ministry of Trade and Industry today, GDP contracted by a further 19.7% q-o-q in Q1 2009, with the decline accentuated by a reduction in pharmaceutical output. Both electronics manufacturing and financial services experienced a slower rate of contraction in early 2009 compared to Q4 2008.
"Looking ahead, some moderation in the rate of decline in economic activity around the world is expected following the steep fall since the end of last year.
"A number of leading indicators have recently picked up slightly, and consumption spending has held up somewhat better than expected, particularly in the US. While this is encouraging, considerable downside risks to growth remain.
"Job losses have been significant, and segments of the broader credit market continue to be impaired.
"Against this backdrop and in view of the sharp fall in domestic economic output over the past two quarters, Singapore’s GDP growth forecast for 2009 has been lowered to between -9% and -6%," The MAS said on its website.
The central bank said yesterday it will continue its neutral policy on the currency even as it re- centered the band “to the prevailing level” of exchange rates.
The currency has largely moved in the lower half of the previous policy band since the last review in October, the central bank said. The Singapore dollar, which has fallen 4.8 % so far in 2009, rose after the statement from the MAS and the Trade Ministry were published.
“The global economy is expected to remain weak in the coming quarters,” the trade ministry said. “While there are tentative signs of some stabilization in the housing, financial and manufacturing sectors in the U.S., they do not point to a clear turnaround in economic activity.”
The country’s exports dropped 17% in March, the 11th month of declines. Now the forecast for 2009’s export performance has been downgraded: overseas shipments may drop by as much as 13% this year, against the January forecast for a 9%-11% fall.
Manufacturing, which accounts for a quarter of the economy, fell 29% in the March quarter this year, compared with the same period of 2009. It’s a similar story across the developed and developing world.
But inflation is no longer a concern (also being experienced elsewhere).
The MAS said "CPI inflation has slowed significantly to 2.4% year-on-year in Jan-Feb 2009, from 5.4% in Q4 last year.
"This was largely due to the sharp decline in the prices of direct oil-related items, such as petrol, as well as a moderation in food price increases. In addition, price increases of several retail items such as clothing and household durables have eased.
"CPI inflation will continue to fall in the coming months, reflecting a combination of lower commodity prices and increased slack in the domestic economy.
"Domestic cost pressures are moderating, as evidenced by the fall in rentals and more subdued wage increases.
"With the high base in 2008, headline inflation would temporarily turn negative in certain months this year. For the whole of 2009, the CPI inflation forecast is unchanged at -1% to 0%.1
"Amidst the global downturn and continuing stresses in world financial markets, external and domestic inflationary pressures are dissipating.
"Meanwhile, the domestic economy is likely to remain below potential till a decisive recovery is seen in Singapore’s export markets."
The MAS said that in its opinion the current level for the Singapore dollar "is appropriate for maintaining domestic price stability over the medium term, taking into account the prospects for growth in the Singapore economy."
"There is therefore no reason for any undue weakening of the Singapore dollar."
That comment contributed to the market reaction to the re-centering of the currency’s target band.
Singapore’s dollar rose to a two- month high after the central bank released its statement.
The MAS’s move was its usual twice- yearly policy review. They don’t always involve a change in the value of the currency, so yesterday’s move was a surprise.
Singapore’s dollar gained 0.7% to trade at S$1.505
