Singapore avoids technical recession, eases monetary policy

Singapore narrowly avoided being in a technical recession for the third quarter, after growing marginally at a seasonally-adjusted and annualised rate of +0.1% q/q, according to advance estimates, and against the average forecast of -0.1%.

MAS Building
Source: Bloomberg

This followed the -2.5% fall in Q2. Manufacturing activity remains in the doldrums while growth in financial services was also weak. It is unsurprisingly, given that global growth remains soft. In fact, the Monetary Authority of Singapore (MAS) assessed that ‘the overall outlook for the global economy has softened compared to the review in April’.

Slowing growth momentum in China, gradual pickup in economic activity in Eurozone and Japan, as well as weak US import demand are likely to dampen growth prospects in the Asia ex Japan region. It will also weigh on the external-oriented industries in Singapore in the coming quarters.

Overall, the Singapore government sees 2015 GDP at around 2.0%-2.5% with downside risks waiting in the fold. Moreover, growth next year is likely to expand at a similar pace, as above-mentioned headwinds are likely to persist in early 2016.


Inflation to pick up in 2016

The Singapore central bank expects inflationary pressure to pick up next year, as the disinflationary effects of lower energy prices, budget measures and SG50 price promotions starts to fade into the end of 2015. However, the rise in core inflation is likely to be gradual, estimated to average +0.5%-1.5% in 2016, compared to +0.5% this year.

Meanwhile, core CPI (which excludes the costs of private road transport and accommodation) remained subdued, where falling fuel prices filtered through to prices of local oil-related items.


MAS eases policy

Against the backdrop of anticipated modest expansion in the Singapore economy, and a gradual acceleration in core inflation next year, the MAS decided to maintain its stance of a modest and gradual appreciation of the S$NEER policy band, however they deemed it appropriate to reduce slightly the rate of appreciation.

The S$NEER has softened and moved largely in the lower half of the policy band since July, as strong expectations of US Fed rate hike and heightened risk aversion exert downward pressure on the Singapore dollar.

As such, the slope of the S$NEER policy band is reduced slightly. There was no change to the width and centre of the policy band. The policy decision was a continuation of the surprise move to reduce the slope in January this year.

What was surprising is that SGD actually appreciated following the MAS move. The USD/SGD dipped to nearly one-month low of 1.3908 before an intense struggle ensued, which saw the pair trading at around 1.4000. The sellers eventually prevailed, pushing the pair to mid-1.3900.

There were talks that banks and leveraged names were cutting their long USD/SGD positions, as the MAS move was not as aggressive as originally believed. Given sizable expectations of policy easing, the ‘slight reduction’ in the S$NEER slope was disappointing. The surprise upside in the preliminary estimate of Q3 GDP also contributed to the SGD demand.


Asia ahead

Some paring of risk appetite in the overnight markets will set the cautious tone in Asia today. Regional indices are likely to come under more pressure, although Asian currencies may be cushioned given a relatively flat US dollar. EUR/USD is looking to test 1.14 again while USD/JPY is pressing on the 119.50 support. USD/SGD is likely to stabilise above 1.3950 in the day, after the initial dip. Data-wise, China’s consumer inflation, alongside India’s wholesale prices data are due.


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