Singapore GDP growth falls to 8.3% in Q1 2011

GDP growth came out strong in Q1 2011 at 8.3% yo-y after 12% in Q4 2010. Private consumption held up, cheered on by favourable labour market conditions. Investments declined, however, led by transport equipment, while restocking and exports picked up. On the supply side, manufacturing drove the sequential rebound led by biomedical, electronics, and precision engineering. Services also saw stronger momentum, led by financial services.

Growth is expected to ease in the coming quarters.
While retail sales bounced in April, the global soft patch is showing up in softer readings for industrial production and exports. However, the stronger than-expected Q1 and the assumption that the global slowdown will prove temporary have led us to raise our forecast for 2011 growth to 6.2% y-o-y from 5.8% previously. Relative to last year, growth is still expected to be softer, which is mostly due to the smaller contribution from exports and a draw down in inventories.

These factors are expected to reverse in 2012 with the recovery in global growth solidifying. However, private consumption growth is expected to come off a bit after the growth spurt this year. Like elsewhere in the region, inflation has been on the rise. This was initially due to rising costs of accommodation and politically engineered increases in car prices, but has recently become more broad based as capacity remains tight and demand-led price pressures are building. This will persist even as growth eases to a more sustainable pace. Higher energy costs will also add to inflation.

The MAS, as expected, re-centred the nominal effective exchange-rate band at its monetary policy meeting in April to tackle underlying inflation pressures. Fiscal policy could also turn out tighter than budgeted given the typically conservative assumptions underlying the 2011/12 budget. With growth holding up, however, the MAS will need to utilize the upward flexibility within the band and may have to move again in October.