Singaporeans and tourists are scaling up spending:HSBC

The January retail sales numbers was one of the surprises Singapore has delivered over the past few months.

According to HSBC, while growth is still expected to slow in 2011 following the rapid rebound last year, the slowdown may not be as pronounced as originally anticipated, baring any further negative surprises in the Middle-East or broader global ramifications of the recent tragic events in Japan.

Reading retail sales number is always a bit tricky in the months immediately prior to the Chinese New Year celebrations, given the slight shift in the exact timing of the festivities from year to year. As it turns out, this year likely saw a lot of the pre-CNY shopping concentrated in January given the early-February start to the CNY. So, this may partly explain the growth surprise.

But, abstracting from the policy driven car sales and looking at retail sales ex cars, this is up by more than 12% y-o-y on average in December-January. This is more than twice the growth rate experienced on average during the preceding 6 months.

Retail sales are building on a sound foundation of good job prospects and rising wages. Tourism is also an important support pillar for retail sales, with tourist arrivals up 16% y-o-y in December and by a total of 22% for 2010 as a whole. These tourists now likely spending more on average than they did a year before, also encouraged by the improved labor market conditions in their home countries, with many coming from fast growing Asian countries. Moreover, the opening of the two IRs may have attracted more well-to-do tourists with deeper pockets.

Even as the economy settles at a more sustainable rate of growth in the coming quarters, capacity will remain tight and spur demand-led inflation pressures. So, the MAS is expected to maintain its tightening bias and likely step it up a notch at the April meeting with a re-centering of the NEER band.

Singaporeans and tourists are scaling up spending and growth is not a concern in HSBC's baseline scenario. However, inflation increasingly will be and a re-centering of the NEER band in April is highly likely.