Singapore economy will grow 5.2%:HSBC

Financial services will be the main driver for growth in 2011.

In a statement, HSBC said, with the global inventory re-stocking cycle maturing, many large construction projects behind us, and a second round of macro-prudential measures kicking in, growth is expected to slow markedly for the manufacturing and construction sectors. However, we share MTI's view that the expansion in the capacity of electronics and biomedical manufacturing will provide some support.

The services sector will be the main driver of growth in 2011, especially financial services (boosted by still solid credit growth and the continued need to inter-mediate large capital inflows) and tourism-related businesses (benefitting from the slip-stream of activity following the opening of the two IRs). Also, increased intra-regional trade will help support activity in the trade-related service sectors, although growth will slow following the bounce back in trade last year from the post-Lehman lows.

However, capacity utilization is elevated, which is evident from the low level of unemployment and rising unit labor costs. Moreover, inflation is ticking up and has further to go. MTI shares this view and have revised up their inflation forecast for 2011 to 3-4% vs. 2-3% previously, noting in their press release with the Q4 numbers that "inflation is expected to rise further to 5.0 to 6.0% during the first few months of this year." We are currently forecasting average CPI inflation of 3.2% for 2011, but there is clearly an upside risk to this forecast.

With growth easing in 2011 but keeping pace with potential, capacity will remain tight and require continued macro-economic policy tightening to avoid a further run-up in inflation. MAS has a policy meeting later during the Spring (April) and this would be a good opportunity to re-jig the tightening stance. Moreover, the budget will be presented tomorrow and while it may include pre-election goodies (i.e. top-ups for CPF and Medi-save, rebates on utility bills and conservancy charges, other low-income transfers, etc.), the overall fiscal stance is expected to jive with the monetary policy efforts to contain inflation pressures. 

Despite the slight downward revision, Singapore's recovery in 2010 did not loose its shine. Turning to this year, growth will ease but keep pace with potential, keeping capacity tight and upward pressures on inflation in place. Further tightening of macroeconomic policies is needed, with the upcoming budget and a Spring monetary policy meeting providing good opportunities to act as needed.