Singapore's economy to expand at more modest pace in 2016

Singapore's economy is projected to expand at a more modest pace this year, against the backdrop of a less favourable external environment, according to the Monetary Authority of Singapore (MAS)'s latest Macroeconomic Review published on Wednesday.

The Macroeconomic Review is published twice a year in conjunction with the release of the MAS monetary policy statement. In its review, MAS said the outlook for the global economy has dimmed since October, with the pace of expansion in the US economy expected to be more modest than anticipated, economic activities in Eurozone and Japan dampened by their appreciating currencies and weak external demand, as well as China's slow down, the Singapore economy will also be further affected.

"In early 2016, the weakness widened to more industries. The pullback was most evident within the modern services cluster, with financial sector activity hit by falling credit demand and lower fee income from fund management after a surge at year-end. The more subdued economic environment also dampened pockets of domestic-oriented activity, although the cluster remained relatively resilient as a whole," MAS said.

Therefore, it projects the economy to grow from 1 percent to 3 percent in 2016.

On the domestic front, MAS noted that labour market tightness is expected to ease further. "Labour supply will continue to moderate amid demographic changes in the resident workforce and reduced foreign worker inflows. However, labour demand will also ebb, stemming from cyclical weakness in the external environment, as well as ongoing industry restructuring, which has led to some skills mismatches," the authority said.

Consequently, it expects the wage growth to soften from 3.5 percent in 2015 to about 2.53.0 percent in 2016. Together with a modest increase in productivity gains, aggregate unit labour cost (ULC) growth is expected to moderate this year. The overall pass-through of domestic costs to consumer prices will continue to be constrained by subdued economic activity.

In terms of inflation, MAS said that as a result of the diminishing drag from oil prices, as well as from budgetary and one-off measures, MAS core inflation is expected to pick up gradually over the course of this year.

Barring a sharp rise in global oil prices, MAS core inflation for 2016 is likely to fall in the lower half of the 0.51.5 percent forecast range, after coming in at 0.5 percent in 2015, while CPI-All Items inflation is projected to be 1.0 to 0 percent, compared to 0.5 percent in the previous year.