Spendthrift Singaporeans helped push retail sales up 2.7% in December 2010

Favorable labor market conditions and booming tourism is keeping retailers happy.

According to HSBC, December retail sales rose by 1.8% y-o-y in nominal terms, a marked improvement from the -2.3% y-o-y decline in November, although weak car sales in December 2009 and high prices in December 2010 bumped up the number. The outcome was well-above consensus and HSBC's forecast (both around 1%). Sales continued to fall in real terms -1.1%, although much less than the -4.6% in November. In sequential terms, sales accelerated in both nominal and real terms, rising by 2.7% (vs. 0.8% in November) in both cases.

Excluding car sales, not distorted by government COE policies, nominal retail sales grew an impressive 8.6% y-o-y (vs. 5.5% in November), above consensus (7.4%) and our forecast (5.8%). Moreover, real sales growth (ex cars) jumped to 7.7% y-o-y (vs. 4.1% in November). On a sequential basis, retail sales (ex cars) also picked up pace. It came in at 2.2% m-o-m (vs. 0.7% in November) in nominal terms and 2.5% m-o-m (vs. 0.8% in November) in real terms.

Car sales actually picked up sequentially, but this would appear to have been driven by higher prices as real sales declined. By non-car components, the pick up in sequential growth was quite broad-based, with only department stores, supermarkets, telecommunications/computers, and others pulling in the other direction. In annual terms, the improvement over November's reading is even more broad-based.

The rapid recovery in growth in Singapore has left consumers with good job prospects, rising incomes, and still positive wealth effects from rising property prices, notwithstanding two rounds of macro-prudential measures to cool property prices. This clearly has provided a solid foundation for retail sales, abstracting from policy driven car sales.

Tourism is also an important support pillar for retail sales, with tourist arrivals up 16% y-o-y in December (unchanged from November) and by a total of 22% y-o-y for 2010 as a whole. Moreover, the length of stay has likely continued to inch up, although data is only available up until October.

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 for a while still and may have to step up tightening. Moreover, fiscal policy should play its part to help quell inflation pressures, making it important to ensure that any budget "goodies" are more than countered by tightening elsewhere.

Singaporeans and tourists seem quite happy to spend and growth is not a concern in Singapore at this moment, but inflation is. This calls for continued monetary and fiscal policy tightening.