Singapore to end 1Q with a whimper despite 'noisy' economic data

1Q growth to slow to 4.1%.

According to J.P. Morgan, Singapore ended 2013 on a stronger note than expected, with large upward revisions across the economy. Early 1Q data are difficult to interpret but January IP and export figures suggest that growth has slowed.

The data probably signal the correct direction in momentum, but also likely overstate the magnitude. The January PMI, which perked back up above 50, supports this view.

Thus, we still look for 1Q growth to slow to 4.1%q/q saar from 6.1% last quarter (our nowcaster is estimating growth of only 1.0%) as February should bounce back. Assuming our quarterly forecasts are correct, the economy should grow 4.5% this year from 4.1% last year.

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Our 2014 growth forecast takes a few countervailing forces into account. First, growth in the US and Europe is forecast to pick up by about 1%-pt this year. Second, Chinese growth is forecast to moderate to 7.4% in 2014 from 7.7%.

Third, tighter monetary conditions, stricter macroprudential and immigration policies, and a more mature credit cycle will likely weigh on domestic demand.

The one bright spot within domestic activity is that fiscal policy will be expansionary for a second straight year as the FY14 budget announced last week continues to focus on providing support to lower-income households (and on boosting productivity).

CPI inflation eased to 1.4%oya in January from 1.5% in December while core inflation (ex. accommodation and private transport) rose to 2.2% from 2.0%. We expect CPI inflation to remain subdued this year as more stable housing and COE prices act as restraints.

However, labor market conditions remain tight. Historically, the unemployment rate and core inflation are closely correlated, so we expect core inflation to firm. As a result, we expect the MAS to keep its modest and gradual appreciation policy stance in April, with a small risk (15%) of further modest tightening of the slope.