This will be a challenging year: DBS

The emphasis is expected to be on reinforcing the productivity drive.

DBS Group Research said:

This will be a challenging year. Although economic conditions in the developed economies have improved slightly in the past month, the situation remains fluid. As it is, a comprehensive resolution to the European debt crisis has yet to materialize and recovery in the US has remained lacklustre.

Moreover, Asia itself is also slowing. While average GDP growth for Asia-10 will still outperform that of the G3 economies by a factor of 3:1, it is expected to moderate to 4.8%, from 5.2% in 2011.

We believe that the current poor economic conditions will prevail for another 1-2 quarters before better growth materializes in the second half of the year. The recovery in the US will likely gain momentum whereas a more solid resolution may be in sight in the Eurozone by then. As a result, full year GDP growth in 2012 will likely come in at 3.5%, down from 5.0% in 2011.

Separately, inflation hit a three year high of 5.2% in 2011 and has remained persistently above the 5% mark in recent months. Transport and rental costs are expected to remain high in the near term with underlying wage pressure one of the key “invisible” drivers of inflation. While inflation is expected to ease to 3% in 2012 due to a slowing global economy, upside risks remain given rising political tension in the Middle-East and possibly higher oil prices.

Growth will be slow in 2012 but recession is not expected. And inflation, though set to ease, will remain fairly high. Companies will feel the strain from both ends, with revenue slowing and costs rising. Most Singaporeans will also be affected, particularly the working class. Overall business cost and general cost of living will continue to escalate.

As such, there is a need to help companies and households cope with the higher costs and weather the slowdown. That said, the upcoming budget will focus more on longer term growth strategies rather than short term countercyclical measures.

The emphasis will be on reinforcing the productivity drive, including help for companies to cope with the transition cost of economic restructuring as well as the strengthening of the social safety net so as to ensure that growth will be inclusive and sustainable.

Indeed, the notion of growing through productivity gains and fostering inclusive growth, thereby creating a more equitable society remains the main objective for the government in the medium term.

We expect a slew of measures to help companies offset the rising business cost and to enhance productivity gains in this upcoming budget. Although outright reduction in corporate tax rate is unlikely, there will be some cost offsetting measures, which may be pegged against productivity improvement. In addition, these will be complemented by a slew of productivity enhancement initiatives.