Singapore economy slows but inflationary pressures rising

William Pesek says that "Asia Is Getting a Bit Too Hot for Its Own Good".

If you strip out the most volatile items, such as food and energy, the rationale goes, Asian inflation looks pretty tame. Oh, it's only high pork prices, China bulls say. It's only because crude oil keeps rising, Asia-market enthusiasts retort.

Yet such arguments are taking on shades of denial as 2008 approaches and inflation accelerates...

The data may be masking the inflation already coursing through economies such as Bangladesh, China, Indonesia, Pakistan, Sri Lanka, Taiwan and Vietnam. For example, Singapore's consumer prices could accelerate from 2.7 percent now to as much as 5 percent in the first quarter of next year, says Chua Hak Bin, Singapore-based economist at Citigroup Inc.

It's probably misleading to cite Singapore's inflation rate because it includes a one-off GST increase. Furthermore, the economy moderated in the third quarter, Bloomberg reports today.

The $132 billion [Singapore] economy grew an annualized 4.3 percent in the third quarter after adjusting for inflation, following a revised 14.5 percent gain in the second quarter. Economists were expecting a 6.4 percent gain.

From a year earlier, the economy expanded 8.9 percent after gaining 8.7 percent in the previous three months. That was lower than initial estimates.

The government forecast for next year does not see much further cooling.

The Southeast Asian economy will expand as much as 6.5 percent next year, higher than an earlier estimate of 6 percent, the trade ministry said in a statement today. Inflation is expected to accelerate to as much as 4.5 percent in 2008 from an average 2 percent this year.

That expected increase in inflation is not triggering any immediate change in monetary policy.

Singapore's inflationary pressures are rising as the economy expands, prompting the central bank last month to say it will allow a faster appreciation in its currency. It said today its currency band, which will be reviewed in April, remains "appropriate." The Singapore dollar has gained 5.8 percent this year against its U.S. counterpart.

It remains to be seen how much longer the current stance on the exchange rate will be seen as appropriate. One-off price effects notwithstanding, it is quite obvious from the third quarter GDP data that the current rate of resource utilisation is not sustainable.