China’s growth will be cushioned by policy easing.
In the quarters ahead, the Chinese authorities are
expected to continue to apply monetary and fiscal
stimuli to the economy in a measured manner, to ease
the adjustment costs arising from structural reforms
and industrial layoffs. Besides successively lowering the
benchmark lending rate and the reserve requirement
ratio for banks over the past year, the central
government recently announced a more expansionary
fiscal stance for 2016 by targeting a budget deficit
amounting to 3% of its GDP. In addition, direct fiscal
spending will be complemented by off-budget
measures, such as local government bond issuances,
the proceeds from which can be used to fund
India is the bright spot in the region.
In the near term, the Indian economy will remain on a
modest expansion path, despite a weak external
environment. Economic activity will continue to be
driven by private consumption, which has received a
fillip from lower energy prices and higher real wages. Looking ahead, an increase in public infrastructure
spending and official efforts to improve the business
environment should gradually crowd in private
Growth projections for the NEA-3
have been revised down sharply.
In Korea and Taiwan, the weakness in
shipments of capital goods and heavy equipment has
extended to electronics, as industrial upgrading in
China’s electronics industry reduced the mainland’s
reliance on imported Korean and Taiwanese
The persistently weak export performance of Korea and
Taiwan is beginning to weigh on domestic economic
activity, as shown by signs of softness in their
manufacturing sectors and labour markets. Hong Kong,
which has been a popular destination for mainland
tourists and an important transhipment hub for China,
is also likely to face challenges.
Growth in Asia ex-Japan will be hampered by the
sharp run-up in debt post-GFC.
The Asia ex-Japan region as a whole is presently
adjusting to the turn in the global financial, credit and
commodity cycles. For several years following the GFC,
low interest rates in the advanced economies,
accompanied by quantitative easing and large capital
outflows, led to a rapid escalation in debt accumulation
in parts of Asia. While the flood of global liquidity
helped to fuel growth, the resultant debt build-up is
now unravelling at a time when commodity prices have
slumped and global interest rates are set to rise. This
deleveraging process, combined with slowing activity,
could result in a period of weak investment and
The increase in leverage is most pronounced in China,
where debt rose largely because of a rapid build-up of
non-financial corporate borrowing. This reflected, in
part, the Chinese government’s efforts to support
growth in the aftermath of the GFC through monetary
Weak Global Demand Will Keep Inflation Low
Global inflation has been muted in the last two years, with low oil prices exerting a strong dampening
effect and sluggish aggregate demand restraining price pressures. In 2016, headline global inflation is
expected to rise slightly to 1.4%, after coming in at 0.9% last year. While underlying price pressures are
likely to stay weak on account of subdued growth, the energy-related drag should dissipate with the
anticipated stabilisation of oil prices. However, in India and the ASEAN economies, where food forms a
larger proportion of the CPI basket, a pickup in food prices due to the El Niño weather phenomenon may
contribute to some inflationary pressures. In 2017, global inflation is projected to increase further to 2.1%,
as economic activity strengthens and the direct and indirect impact of low energy prices fade.
Singapore - Modern services were mainly weighed down
by a pullback in the financial sector.
The rise in the proportion of contracting industries
reflected, in part, the downshift in activity in the
modern services cluster in Q1 2016. In particular, the
finance & insurance industry saw a retraction, partially
due to further reductions in offshore non-bank lending
Upside to global oil prices will
likely be capped as the underlying supply
overhang remains significant.
Notwithstanding the recent rebound in global oil prices
from the January trough, the underlying supply
overhang will likely limit any sustained upward price
movements in the near term. Indeed, global oil
production continues to outstrip demand at a rate of
1.5–2 million barrels per day, even as inventory levels
remain at a record 440 million barrels higher than the
2010–14 average. (Chart 3.19) For the whole of 2016,
EPG expects global oil prices, based on the Brent
benchmark, to average around US$40, lower than the
US$52 recorded last year 9
. Accordingly, oil-related
items are expected to reduce CPI-All Items inflation by
around 0.4% point in 2016, compared to 0.5% point in
the previous year.
Prices of global food commodities could rise gradually
due to unfavourable weather conditions.
Meanwhile, upside risks to food prices arising from
adverse weather conditions remain. Even as the
lingering effects of the hotter and drier climate
associated with El Niño continue to impair global food
supply, the increasing risk of a La Niña event in the
latter half of 2016 could put renewed upward pressure
on global food prices.10 The prolonged period of weak
prices and poor weather conditions appears to have
reduced forecasts for food production.
Housing rentals and car prices will
continue to dampen headline inflation.
Based on current supply pipeline projections, a
significant number of housing units are likely to come
on-stream this year, which will keep the vacancy rate
for private residential properties elevated. Alongside
reduced foreign worker inflows, residential property
rentals are projected to decline further.
Meanwhile, given the substantial expansion in the
number of COE quotas and the generally weak
economic environment, COE prices will likely come
under downward pressure over the course of the year.
Together, car prices and accommodation costs are
expected to pull down CPI-All Items inflation in 2016 by
more than 1% point.
Singapore’s Monetary History:
The Quest For A Nominal Anchor
Singapore is one of the few, if not the only,
country in the world that operates a monetary
policy regime based on a managed float of its
currency. Such a policy framework represents a
notable departure from the bipolar regimes of a
fixed exchange rate or a free float, as well as
intermediate regimes that target domestic
interest rates, while attempting to retain some
influence over the exchange rate.
In this 45th year since MAS was established, this
Special Feature will provide a broad sweep of
Singapore’s search for a nominal anchor since the
early 19th century, covering the period of its
participation in the silver and gold standards, the
fix to the pound sterling in 1914, and the Bretton
Woods system of fixed exchange rates from 1944
until its demise in the early 1970s, followed by the
unsettled period of generalised floating and
finally, the introduction of Singapore’s unique
exchange rate-centred policy in the early 1980s.
The evolution of the system to provide the
nominal anchor for price stability, in the context
of a very open economy and export-driven
development strategy, will be highlighted