Singapore's external engine to speed up growth amidst slow domestic demand

GDP growth to accelerate to 5%.

According to BNP Paribas' Global Outlook report, faster G2 activity should benefit Singapore’s extremely open economy in 2014 and offset sluggish domestic demand, causing GDP growth to accelerate to 5.0% from 4.1% in 2013.

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Tightening global liquidity and the higher domestic interest-rate environment this implies hint at strains on highly leveraged household balance sheets, which we suspect will impede demand, despite labour-market tightness and the resultant upward pressure on wages.

Meanwhile, the sluggish growth outlook for the ASEAN region and the potential for a sharper-than-expected slowdown in China are acting as a headwind to investment in the city-state.

While this may ease domestic inflation pressures, sustained weakening pressure on the SGD against the USD suggests this may be offset by more imported inflation, keeping annual average core CPI inflation at 2.0% y/y.

This, coupled with the financial-stability risk posed by rising domestic interest rates, is likely to encourage the Monetary Authority of Singapore (MAS) to err on the side of caution and retain the current appreciation bias of its unique SGDNEER-based monetary policy.

If falling property prices begin to stoke concern among policymakers, the response should be to unwind macroprudential measures rather than to shift monetary policy to a more neutral bias.