Singapore’s economic expansion eased in 2012 amid weak growth in advanced nations and as companies faced hiring constraints, Prime Minister Lee Hsien Loong said.
Gross domestic product rose 1.2% in 2012, Lee said in his New Year message released in Singapore today. The growth rate Lee estimates implies a fourth-quarter GDP contraction that pushed Singapore into a technical recession, said Michael Wan, an economist at Credit Suisse Group AG.
“It’s a disappointing number,” Wan said. “We’ve seen huge weakness in the manufacturing sector for two keys reasons. One is the high exchange rate, partly because of our policy to use the exchange rate to curb inflation, and the second reason is our domestic policies when it comes to foreign workers.”
A government push to limit the intake of foreign labor has led to a growing shortage of workers and higher business costs, contributing to faster inflation that prevented the central bank from providing stimulus. The Monetary Authority of Singapore tightened policy this year by allowing faster currency gains even as the export-dependent economy suffered from an uneven US recovery and Europe’s protracted sovereign debt crisis.
The Trade Ministry will release fourth-quarter GDP figures at 8 a.m. on Jan. 2. If its numbers confirm the economy shrank this quarter, it would be the country’s first recession since 2009. Five of 11 economists predicted a contraction in a Bloomberg News survey, where the median was for an annualised expansion of 1.6%.
Hiring Woes
The government earlier estimated GDP to expand about 1.5% in 2012 and Lee reiterated a forecast for the economy to grow 1% to 3% in 2013.
“The weak US, European and Japanese economies dampened our growth, but some industries have also had difficulty hiring the workers they need to grow,” Lee, 60, said in his statement. “In our new phase, we must expect slower growth than we have become accustomed to.”
Consumer price gains have averaged 4.9% since the start of 2011, more than double the 1.9% average in the past two decades. The central bank forecasts an inflation rate higher than 4.5% this year and in a 3.5%-to-4.5% range in 2013.
“MAS faces twin challenges of stubborn inflation and sluggish growth,” said Wai Ho Leong, a Singapore-based economist at Barclays Plc. The central bank may “continue to maintain a gradual appreciation stance, even in an environment of below-trend growth,” he said.
Currency Gains
The third-best performing Asian currency this year has failed to stem inflation in a nation that uses its exchange rate rather than borrowing costs to manage prices. Instead, the Singapore dollar’s 6% rise in 2012 may be weighing on the manufacturing industry, said Kit Wei Zheng, an economist at Citigroup Inc., hurting an economy where total exports are equivalent to more than one-and-a-half times its GDP.
Non-oil domestic exports will probably rise 2% to 3% in 2012, lower than a previous forecast of 4% to 5%, the government said last month. It predicts overseas shipments will climb 2% to 4% in 2013.
Ranked by the World Bank as the easiest place to do business, Lee has cut taxes in recent years to spur investment. Rolls-Royce Holdings Plc, Europe’s largest maker of commercial aircraft and ship engines, opened a $700 million manufacturing and assembly plant in February.
Policy Limit
Singapore, located at the southern end of the 600-mile (965-kilometer) Malacca Strait and home to one of the world’s busiest container ports, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts the financial services and tourism industries to reduce reliance on exports.
There is a limit to how far Singapore can use the exchange- rate policy to contain inflation, central bank Managing Director Ravi Menon said in July. Still, the measure remains the broadest and most effective tool, even as it takes longer than usual to moderate price gains, he said.
“The hurdle for easing remains high for now,” said Citigroup’s Kit, who previously worked at the central bank. Inflation will probably “stay elevated through the first quarter” and economic growth is likely to be within the official forecast in 2013, he said.
Rate Cuts
Policy actions have differed among Asian economies this year as some contend with persistent price pressures, while others seek to bolster expansion. Thailand and the Philippines have lowered interest rates, while Indonesia and Malaysia kept their benchmarks unchanged at recent meetings.
Singapore’s GDP shrank for four consecutive quarters through the first three months of 2009 as the country suffered its deepest recession since independence in 1965. Thousands of workers were laid off as the global economy slumped and the government gave cash handouts to companies to help stem losses.
This year’s slowdown hasn’t stopped employers from adding to payrolls. The jobless rate is at a six-quarter low of 1.9%.
“Persistent tightness in the labor market will support wage increases in 2013, some of which will continue to be passed through to consumer prices,” the Trade Ministry and central bank said on Dec. 24. “Inflation will remain elevated” this quarter and next, they said.
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