Oct. 27 (Bloomberg) -- Singapore’s growth will stall over the next few quarters as the global economy deteriorates, before a “modest recovery” in the second half of 2012, the central bank said.
Gross domestic product will probably increase about 5 percent this year and the expansion may slow to below the economy’s potential rate of 3 percent to 5 percent in 2012, the Monetary Authority of Singapore said in a report today, reiterating earlier forecasts. The central bank, which said this month that it will slow currency gains while allowing a modest and gradual appreciation, said today the stance will anchor price expectations and support growth.
The monetary authority, which uses the island’s dollar to manage inflation, joins Asian policy makers in trying to juggle price pressures with protecting growth amid a faltering global recovery. Dubbed the region’s most volatile economy by Credit Suisse Group AG in July, Singapore may experience “larger swings” in economic expansion, according to the central bank.
“The immediate outlook is clouded by significant uncertainties,” the central bank said. “The step-up in uncertainties in recent months has clearly skewed the risks towards the downside, with the outlook in Singapore very much dependent on how economic events in the U.S. and euro zone unfold.”
European leaders agreed on a plan to expand a bailout fund to stem the region’s debt crisis today. French President Nicolas Sarkozy said the fund will be leveraged by four to five times, and investors have agreed to a voluntary writedown of 50 percent on Greek debt.
The risk of another global recession triggered by Europe’s crisis and a weakening U.S. economy erased about $10 trillion of equities worldwide last quarter and prompted officials from China to Indonesia to boost fiscal measures or cut interest rates. Singapore’s monetary policy stance has been “recalibrated to support the economy’s transition to a weaker phase in the business cycle,” the central bank said today.
“Given Singapore’s heavy exposure on global production, trade and financial flows, the economy will not be able to avoid the knock-on effects of the deteriorating external environment and the softening global IT cycle,” it said. “The manufacturing, transport-hub, financial and tourism services sectors will be disproportionately affected.”
The monetary authority guides the local dollar against a basket of currencies within an undisclosed band. It adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. The central bank said in April it would allow further currency strengthening.
Singapore Dollar Peak
The Singapore dollar “mostly fluctuated” in the upper half of the exchange-rate policy band after the April policy review and reached a peak in early September, the central bank said. It weakened to the lower half of the band last month amid risk aversion because of the European debt crisis, it said.
The currency was the second-worst performer in Asia last month, falling about 8 percent against its U.S. counterpart, according to data compiled by Bloomberg. It traded at S$1.2645 a dollar as of 11:45 a.m. in Singapore today.
Inflation will average about 5 percent this year and 2.5 percent to 3.5 percent in 2012, the central bank reiterated today.
“Domestic cost pressures will abate as the tightness in the labor market gradually eases,” it said. “Accommodation costs and car prices will remain sticky in the near term, given continuing supply constraints. This will keep headline CPI inflation high for the rest of 2011 and into the early part of 2012 before falling more significantly in the second half of the year.”
--Editors: Stephanie Phang, Lars Klemming.
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