Deflation alert: Is Singapore headed for a recession?

November CPI sank into the red for the first time in 5 years.

The country’s November inflation print took many by surprise, after it crashed to a 59-month low and sank into the red for the first time since December 2009.

CPI inflation posted a 0.3% year-on-year decline, while Core inflation also eased furhter from 1+1.7% year-on-year in October to 1.6% year-on-year in November. These figures have prompted fears of a recession brought about by a deflationary spiral.

However, analysts note that deflationary fears are unwarranted. According to UOB, the current situation has striking differences from the country’s last recession, which occurred during the height of the Global Financial Crisis.

“Singapore’s GDP contracted for four sequential quarters from 2Q 2008 to 1Q 2009, and prices plunged into the negative zone for six consecutive months from June to December 2009 (prices generally lag economic growth). However, this time is different and so the worries are unwarranted. Singapore is not facing such issues currently.

Unemployment remained at a low of 1.9% (3Q 2014), while the MTI estimated GDP to grow 3.0% in 2014 and 2-4% in 2015. Moreover, lower prices were a result of administrative measures designed to curb excess consumer leverage in the purchase of houses and cars, and not due to a lack of demand. Additionally, the subsidies on medical treatment through the Pioneer Generation package and falling oil prices all fell into place to push overall price levels lower,” stated UOB.

Here’s more from UOB:
Going forward, we cannot rule out a few more months of headline “deflation” largely due to oil prices at a significantly high base in 1H 2014 (Brent oil prices hit a high of US$115 (on 19 June 2014) before beginning its accelerated fall current levels. 

But the core inflation will remain elevated on the persistent domestic inflationary pressures imposed by the tight labour market due to the tighter foreign workers quota & higher levies imposed. 

We maintain our 2015 headline inflation forecast at 0.9%, and core inflation at 1.9% but we note that there is significant risk that the headline could be lower (due to negative oil price surprise) while the core inflation risk is on the upward (due to the tight labour market conditions). The Monetary Authority of Singapore maintained 2015 headline inflation forecast at 0.5-1.5%, while core inflation to average 2-3% in 2015.