Friday, May 6, 2016

MAS macroeconomic review April 2016

Good read:

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 infrastructure works.

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 investment.

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 components.

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 consumption growth. 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 easing.

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