Inflation tipped to rise with strong growth

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With inflation at 4.1%, I am really glad I am managing a blended yield of about 5-6% on my investments currently. Confused

Jun 9, 2011
Inflation tipped to rise with strong growth

Full-year expansion of 6.2% expected, with inflation rising to 4.1%
By Aaron Low, Economics Correspondent

INFLATION may push past official forecasts this year, as the economy grows more strongly than previously expected.

Private sector economists surveyed by the Monetary Authority of Singapore are tipping a full-year economic expansion of 6.2 per cent after a healthy set of economic figures in the first quarter.

This is up from their forecast of 5.7 per cent just three months ago and is at the midpoint of the Government's recently upgraded 5 per cent to 7 per cent projection.

But as expectations for growth have climbed, so have worries over inflation, according to the same survey, which was released yesterday.

The quarterly poll, involving 21 economists surveyed last month, found that their median inflation forecast has now inched up to 4.1 per cent - a notch higher than the 4 per cent they predicted back in March.

More significantly, this forecast surpasses the official tip of between 3 per cent and 4 per cent inflation this year.

The higher projection comes despite the Government indicating in April that inflation has probably peaked in the first quarter of this year and will ease in the coming months.

Economists, however, believe rising food and oil prices and tighter foreign labour policies might feed into inflation in the second half of the year.

Bank of America Merrill Lynch economist Chua Hak Bin said the current tight labour market and policies may create wage pressures that appear only later on.

'I think most agree that inflation has peaked but disagree with the Government over how fast inflation will drop,' said Dr Chua, who is tipping inflation at 4.2 per cent for the year.

'The Government probably factored in a faster pace of moderation, which accounts for the slight difference' in forecasts, he added.

And while food prices appear to have stabilised, the threat of another food supply shock still remains, said Barclays Capital economist Leong Wai Ho.

This is especially so with the sudden dry weather causing droughts in China and Taiwan, he noted.

But Mr Leong added that inflation could still come in below 4 per cent overall, especially since car prices - which form 16 per cent of the consumer price index - are not accelerating. His own forecast is for 3.7 per cent inflation.

The upgrades to both growth and inflation forecasts are not surprising given that the Singapore economy grew a faster-than-expected 8.3 per cent in the first quarter, said economists.

Even an anticipated dip in growth in the second quarter - to just 2 per cent year on year - is not likely to derail a solid full-year expansion, they added.

Action Economics' David Cohen, who has pencilled in 6.5 per cent growth for the year, said that barring a double dip in the global economy, growth figures should remain robust.

'The 8.3 per cent figure was really strong and lifted the average growth figures across the board,' he said.

Mr Leong also pointed to new investments in the services sector, such as additions to office space in the Marina Bay Financial Centre, that have accelerated services growth.

But there are a few economists who are more pessimistic about Singapore's growth prospects. JP Morgan's Mr Matt Hildebrandt has cut his growth forecast from 5.3 per cent to 4.7 per cent. He cited a slowdown in global manufacturing, higher oil prices dampening consumer spending, and supply chain constraints after Japan's natural disasters.

'While we expect global growth to rebound in the second half, there are signs that the pick-up may not happen until later in the third quarter, or may not be as strong as we once thought,' he said.

'Any time global growth disappoints, Singapore's growth probably will too.'

Economists polled in the survey also expect the Singapore dollar to strengthen to $1.21 against the greenback, up from the $1.23 prediction three months ago.

Interest rates are also expected to remain low, while bank loans should grow 15.8 per cent this year, the survey found.

aaronl@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
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