Singapore’s unemployment hits three-year low of 1.9%

Range-bound trading in 2H11. FSSTI is likely to trade range-bound within 2,900-3,400 in view of limited positive catalysts and external uncertainties. The lower range is based on an equity risk premium range of 6.5% or +50bp from the current risk premium. We do not expect domestic factors to take centre stage after the recent GE and for the FSSTI to take the cue from overseas markets and external developments in the near term. In the absence of any major external developments, attention could swing to the upcoming reporting season but we see limited scope for earnings surprises in 2011 on margin pressures.

External prospects are still very mixed. We believe investors are likely to remain cautious on external uncertainties such as the sputtering US recovery, Eurozone debt overhang, slower-than-expected China growth and lingering geo-political risks. Risk aversion is likely to remain high on heightened volatility.

Resilient growth prospects. UOB Economic-Treasury Research has forecast GDP could grow 5.7% in 2011 and 5.0% in 2012. Our 2011 estimate is close to the middle of the Ministry of Trade and Industry’s forecast range of 5-7%.

Driving GDP will be growth in the manufacturing and services sectors. Manufacturing will be underpinned by new plant operations in the chemicals cluster and inventory building activities in the biomedical sciences cluster. MTI pointed to the financial services sector being supported by lending and insurance activities. The tourism industry remains buoyant and we forecast tourist arrivals to rise 10% yoy to 12.8m in 2011 and 7.7% yoy to 13.7m in 2012.

That said, Singapore’s open economy could mean that it is vulnerable to major external shocks. As an indication, trade to GDP is more than 2x and Singapore’s major trading partners include the US and EU with 11% and 16% share of Singapore’s non-oil domestic exports respectively. 

Solid domestic economy. Singapore’s domestic economy remains very robust. Unemployment of 1.9% as at Mar 11 is at a three-year low. In fact, job creation of 54,000 in 1Q11 is a new high since the series started in Mar 06. With the significant rise in job vacancies and lower unemployment, the ratio of job vacancies to unemployed persons rose over the quarter from 104 to 139 job vacancies for every 100 job seekers in Mar 11. This is comparable to the pre-recession high of 140 vacancies for 100 job seekers in Dec 07. 

May CPI rose 4.5% yoy due to higher transport, housing and food costs. In May 11, the Monetary Authority of Singapore’s core inflation excluding costs of accommodation and private road transport was 2.1% yoy. This is within the MAS forecast range of 2.0-3.0%. Inflation appears to have peaked in Jan 11 and in the absence of any major surprises, UOB ETR believes MAS is unlikely to adopt a tightening stance in the upcoming monetary policy meeting in Oct 11.