Sluggish retail sales and the appreciating SGD have limited price gains.
In light with the weak inflation dynamics during the first months of 2019, Fitch Solutions expects headline inflation to average 0.9% in 2019, a downward revision from its previous forecast of 1.3%, a report revealed.
However, this would still mark an increase from 0.4% in 2018, the firm said.
The revised inflation outlook is informed by the weaker growth outlook, including softness in the domestic market as evidenced by sluggish retail sales which have contracted five months in a row. Moreover,increased competition in the telecommunications and utility sectors, the still appreciating Singapore dollar nominal effective exchange rate ($NEER) and a stable oil price outlook will also help to limit price gains, Fitch added.
“Overall, this means that core inflation is likely to remain within the lower part of the Monetary Authority of Singapore’s (MAS) forecasted range of 1-2%. The weak inflationary price pressure will allow the MAS to reduce the slope of the $NEER without negatively impacting the inflation outlook,” Fitch Solutions noted.
The firm also added that MAS may likely reduce the slope of $NEER at its biannual policy meeting in October. This detracts from the firm’s previous view held earlier in 2019 when it initially anticipated the MAS standing pat in 2019.
However, the revised view is in line with the concerns Fitch Solutions raised in March on a weakening outlook for trade and the global economy that have started to feed through the economy of the island-nation.
“Indeed, exports have declined by an average of 8.6% YoY in the first five months of the year, leading to real gross domestic product (GDP) growth contracting by 3.4% QoQ in Q2 2019. As a result, the economy of Singapore is now facing a risk of technical recession, defined by growth contracting for two consecutive quarters on a QoQ basis,” Fitch Solutions said.
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The $NEER remains on an appreciating trend as the MAS raised the slope of the policy bands twice in 2018 as the Fed raised interest rates four times in the year, the report noted. As a result the $NEER has been appreciating against a basket of currencies defined by the MAS, and has been trading close to the upper band of the policy range. “After weakening in H1 2018, the SGD/USD cross has since stabilised between $1.3450/USD and $1.3850/USD. A stronger $NEER helps to lower imported inflation and to boost the purchasing power of Singaporean citizens,” the firm explained.
That said, the external sector will be key for Singapore’s small and open economy given that exports account for approximately 180% of GDP and a strong currency can dampen the outlook for trade, particularly at a time when external demand is weakening. Fitch Solutions noted that policy action by the MAS to reduce the slope of the $NEER could help the SGD to remain competitive, especially as major and Asian central banks have embarked on an easing path to support growth, and as such MAS action would help bolster the export sector in Singapore.
Fitch Solutions forecasts exports in Singapore to contract by about 1% in 2019 against the backdrop of weak global trade, compared to growth of 5.7% and 5.1% in 2017 and 2018, respectively.
“We expect tariffs to remain elevated over the coming months and ongoing negotiations between the US and China will be a key determinant for trade momentum across Asia and in particularly for Singapore. We believe that the probability of a comprehensive and major deal between both parties is unlikely given the wide gulf in demands between both parties,” the firm added.
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