Here's why monetary easing is not necessary despite weak economy

Q3 may be the weakest quarter of the year but a rebound is due Q4, says Nomura.

Singapore‟s Q3 GDP flash estimates came in at 1.3% y-o-y, above consensus expectations of 1.1%.

On a sequential basis, this implies growth contracted by 1.5% q-o-q saar. Q2 was revised significantly higher to 0.2% q-o-q saar versus -0.7% earlier, suggesting the economy avoided a technical recession (or two quarters of consecutive negative growth).

The weakening in Q3 was mainly due to the manufacturing sector, which saw growth fall for a second quarter (-3.9% q-o-q saar, from -0.1% in Q2). The construction sector also lost momentum, but this was after a strong upward revision of Q2 construction data (which was the main reason for the Q2 upgrade in overall GDP growth), led by private industrial and residential projects.

The services sector held up relatively well, growing by a modest 0.1% q-o-q after declining by 0.4% in Q2 on the
back of financial and insurance services.

Nomura reiterates it 2012 GDP growth forecast at 1.8%, which implies that Q3 is the weakest quarter of the year and that a rebound in Q4 is due.

"Our forecast is supported by tentative signs of a pick-up in electronics exports, and importantly, our view that the Chinese economy is bottoming out. The government also cited expansion in the transport engineering and the construction sectors, allowing it to maintain its forecast range of 1.5-2.5% growth for 2012. These sectors have benefited from strong demand for oil rigs as well as a buoyant domestic property market," said Nomura.

Against this backdrop, the Monetary Authority of Singapore (MAS) kept its policy of a modest and gradual appreciation of the S$NEER policy band, maintaining the slope, width and mid- point of the band.

Nomura said that this was in line with its expectations, which were mainly based on the view that the growth and inflation mix remains consistent with the MAS‟s previous assessment of the outlook and therefore an easing was not necessarily warranted.

"If anything, the MAS seems to see growth as still likely to expand, albeit at a modest pace, but the risks to inflation remain to the upside. Indeed, the policy statement took a more hawkish tone on inflation, highlighting that 'the labour market should remain tight” and “MAS core inflation receded recently but will face upward pressure from higher food and services costs. CPI-All Items inflation will remain elevated for some time,' said Nomura.

"Additionally, we think this policy outcome is appropriate in the context of the longer-term economic objectives of the authorities. This is consistent with earlier tightening measures to try to cool the property market, which forms part of the „monetary policy plus‟ framework that complements FX policy with macro-prudential measures. More broadly, fiscal policy has also remained neutral, in our view: unlike the rest of the region, no strong fiscal stimulus has been provided by the government to counteract external headwinds, focusing instead on finding ways to encourage the private sector to adopt productivity-enhancing measures in line with the economic restructuring embarked on some two years ago," it added.