Singapore inflation stays at 26-year high

Prices jump 6.5%, driven by higher food, transport and housing costs (by Bryan Lee, Economics Correspondent, 25 March 2008)

CONSUMER prices surged 6.5 per cent last month from a year ago, continuing a rate of increase not seen in 26 years.

Food, transport and housing costs were again the main drivers as a confluence of external and internal factors kept last month's inflation at just a shade off January's 6.6 per cent.

The figure - released by the Department of Statistics yesterday - was broadly within market expectations. A Bloomberg News poll of 17 economists tipped a rate of 6.8 per cent.

Experts said rising prices will persuade the Monetary Authority of Singapore (MAS) to keep its policy of allowing the local currency to strengthen, to help fight off higher prices of imported goods.

But there is less consensus as to whether the central bank will get more aggressive when it holds its scheduled review next month. Any tightening of monetary policy will hurt an already slowing economy.

'February's consumer price index moderated a touch but still stayed elevated,' said Goldman Sachs economists Mark Tan and Michael Buchanan, who expect inflation to peak at around 7 per cent in the first half of the year.

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On the increase
Prices of meat and poultry, cooking oils and dairy products clocked double-digit gains, while rice, cereal and fruit cost almost 10 per cent more than they did last year.

High oil prices also made themselves felt in electricity bills and at petrol pumps.

Indeed, transport costs jumped 9.6 per cent, boosted also by higher taxi fares and car prices.

Housing costs surged the most at 8.8 per cent. But this was mostly a pass-on effect from January's one-off revision in annual home values.

Health-care costs rose 7.4 per cent from higher hospitalisation fees and medical consultation charges - and also as Chinese herbs became costlier.

Standard Chartered Bank economist Alvin Liew said sustained increases in this area are of concern, especially as the population gets older.

He noted that the sector is especially dependent on foreign nurses. Competition for these workers and the rising currencies of their home countries may be driving up wage costs in Singapore.

The statistics department also highlighted foreign maid salaries, holidays, cable subscriptions and cigarettes as other significant sources of inflation.

The Trade and Industry Ministry issued an accompanying statement yesterday, saying the 'underlying momentum in inflation remained stable'. It expects this to decline 'during the year' and is retaining its forecast of 4.5 to 5.5 per cent for annual inflation.

Still, Mr Tan and Mr Buchanan believe the MAS will move next month to allow for a faster appreciation of the Singapore dollar.

'Slowing growth is an obstacle...but in our view, the easing in fiscal settings revealed in the 2008 Budget and low interest rates will provide a buffer to growth,' they said.

But Citigroup economist Kit Wei Zheng reckons the MAS will stay put as growth concerns take precedence.

He raised his full-year inflation forecast to 5.4 per cent, ahead of the latest data. But he also slashed his economic growth estimate to 4.7 per cent, from 5.2 per cent, citing worsening United States conditions.

Moderate impact on Singapore economy

THE steep losses in the Singapore share market may mirror the plunges on Wall Street, but economists believe the impact on the financial sector and the wider economy here will be considerably more moderate. (by Bryan Lee, ST 23 March 2008)

They believe the local financial sector is cashed up while the mega building projects that started last year will keep the economy going for the next few years.

'Singapore is entering this crisis in as good a position as it can hope for,' said Deutsche Bank economist Sanjeev Sanyal.

'There is very strong demand created from big investment projects, such as the integrated resorts, the Marina Bay business district and the Formula One circuit.'

All of these projects, he said, are unlikely to be derailed in any circumstance and will be key growth drivers for the local economy in the next few years.

Mr Sanyal added that the financial sector here is also well-regulated and well-capitalised: 'If something nasty happens, Singapore banks are liquid and under-leveraged.'

He noted that local banks were among the few survivors from the 1997 Asian crisis.

'Now that this is a far more distant hit, Singapore banks are not in any particular danger,' he added.

The relatively conservative investment policies of the three local banks have meant limited exposure to toxic sub-prime instruments.

This prudence has also left the local lenders with strong balance sheets - they are cash rich, with robust capital reserves and a moderate dependence on leverage for their operations.

The Monetary Authority of Singapore said last Monday, after the fall of US investment bank Bear Stearns, that most players here have not experienced problems arising from the ongoing turmoil.

Still, as a key financial centre, the local industry is closely linked to its American and European counterparts.

Citigroup economist Chua Hak Bin said that in a worst-case scenario where big global banks fail, they will pull back their operations here. Many of them have a significant presence here and are key players in the local industry.

More vulnerable is the manufacturing sector, which is driven largely by external demand.

'If the US enters into a deeper and longer slowdown, the second half of 2008 will be more dicey for exporters,' said CIMB-GK economist Song Seng Wun.

Consumers here may also pull back on spending as sentiment will degenerate in the face of a protracted US recession, he said.

'It's all an issue of confidence. Consumer confidence here is still robust but we are starting to see some softening in the property market. This could become more significant if the crisis drags on.'

Homework to be completed in March Hols (10 to 16 March 2008)

1) Complete the Independent Learning Package on Topic 5: Unemployment

• Go through the audio-visual CDRom, together with the lecture notes for the topic thoroughly. Seek help from your peers or tutors, if necessary.
• Attempt the Online MCQ Assessment in Litespeed (15 questions) and submit online by Sunday 16 March 2008 11.59pm

2) To prepare for the lecture test postmortem when school reopens, rewrite the following essay from the lecture essay test on Determination of National Income in Term 1 Week 10 (Note that this task is compulsory if you have failed the test - Do correct your mistakes based on the remarks & comments given in your returned answer script):

There was a spate of good news for Singapore in 2007 such as the country attracting a record of $16.1b of investments, tourist arrivals hitting a record of 10.3 m, the government forking out $1.86 b for the new Sports Hub and a successful bid to host the F1 race. Unemployment was at an all time low of 2.1%. However, the inflation rate was at an all time high of 4.4% in December and there were fears of a US recession.

To what extent is rising aggregate demand beneficial to the Singapore economy? [25]

3) Prepare Tutorial 3: CPI and Inflation:

• Review your Topic 3 lecture notes for any areas that you do not understand. Make sure you are thoroughly familiar with the "Causes" and "Consequences" of Inflation, taking note of real life examples given.
• Prepare the essay questions in Tutorial 3 for when school reopens.

4) Attempt the following revision essay questions based on the previous 3 topics. Do up either full-length answers (Self-timed in 45mins) or detailed essay outlines (with relevant diagrams and analysis as well as application to context) (Note that this task is optional but you are strongly encouraged to attempt the questions if you have failed either one or both of your previous class tests! Answers will be provided in Litespeed later):

Essay 1: Market Failure
"To prevent overfishing, the government stipulates the length of boats and time for fishing. This has resulted in fishermen using wider boats and better technology to increase their catch."

(a) Explain why overfishing may be a form of market failure. [10]
(b) Discuss whether government regulation is adequate and desirable in solving the market failure stated in (a). [15]

Essay 2: National Income Accounting and Determination of NY
"India's economic performance would seem remarkable. Since opening up to the global economy in 1991, the country has achieved average annual economic growth of about 6%. The proportion of people living below the poverty line fell and its average GDP per head, adjusted for purchasing power, has doubled. ".......................The Economist, 3 March 2005

(a) Explain how "opening up to the global economy" has benefited the India economy. [10]
(b) To what extent does the above quotation reflect an improvement in India's living standard? [15]

5) Be prepared for the Upcoming Econs assessments:

• Lecture Test (Essay) in T2 Wk 3: Inflation (Causes & Consequences)
  
• Lecture Test (Case Study) in T2 Wk 6: Macroeconomic Variables (GPL, EG, Unemployment & BOP), Problems & Objectives (Topics 3 to 7)
• Mid-year Exams (Format to be confirmed) in T2 Wk 9: All topics from Year 2 (up to Monetary Policy)
  

Extra March Holiday Lesson on 14 March 08 Friday (for all except 07S01)

for the postmortem for Class Test 2 - Essay Qn on National Income Accounting

It was reported that in the last 10 years there has been an improvement in the standard of living of the average person in Namibia.

(a) If you were asked as an economist to show that the average person in Namibia is better off then ten years ago, explain what information you would need. [12]

(b) Comment on the difficulties of comparing living standards between countries. [13]

Venue: Room 208

Date: 14 March 2008 (Friday)

Time:
07S28 - 8.30am to 9.30am
07L01/L02 - 9.30am to 10.30am
07S10 and 07S30 - 10.30 to 11.30am

Do come with your answer scripts, questions to ask and the suggested answer and mark scheme for the test (You can download it from Litespeed).

Trivial about John Maynard Keynes

When Keynes took the British civil service exam, his lowest score was on the _____________ section.

a. logic
b. mathematics
c. statistics
d. economics
e. history

Answer: d

hahahaha...