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Singapore's economy gathers pace, growth at four-year high

Central bank keeps local dollar on zero appreciation path in absence of price pressures

SINGAPORE (Nikkei Markets) -- Singapore's economy grew the most in nearly four years during the third quarter as manufacturing surged and the services sector continued to recover. However, the central bank retained its benign outlook on inflation, saying the economy would expand at a steady, but slightly slower, pace next year.

As widely expected by private sector economists, the Monetary Authority of Singapore, which uses the exchange-rate as the basis for policy, retained its neutral stance Friday and said it would keep the local dollar on a zero-appreciation path, as it has done in the past 18 months.

"Growth across the Singapore economy should become more even in the quarters ahead. The boost imparted by the IT-related industries is expected to diminish but remain positive, while the pace of contraction in the weaker sectors of the economy is likely to level off," MAS said in its half-yearly monetary policy statement.

Advance estimates released around the same time by the Ministry of Trade and Industry showed gross domestic product expanded 4.6% in the third quarter from a year ago, accelerating from the 2.9% increase in the second quarter. The growth was the strongest since the economy gained 4.9% in the first three months of 2014.

Compared to the previous quarter, the Singapore economy grew at a seasonally adjusted and annualized rate of 6.3%, faster than the 2.4% achieved in the previous period.

Manufacturing was the star performer once again, with growth accelerating to 15.5% on-year from 8.2% in the second quarter. MTI said the expansion was mainly due to robust expansion in the electronics, biomedical and precision engineering clusters.

Services grew at a slightly faster pace of 2.6% from a year ago, while construction contracted by 6.3% following a decline of 6.8% in the second quarter.

Looking ahead, MAS said that the strengthening of sentiment and gradual recovery in the labor market would also support activity in the domestic-oriented services.

While the central bank noted that cost pressures should "remain relatively restrained," it was vague about when it might consider tightening policy, leaving open the possibility that it could switch to a policy of allowing a modest and gradual appreciation of the Singapore dollar as early as April next year.

Singapore manages monetary policy by letting its dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band. The central bank can also adjust the width of the band to allow more volatility.

MAS said in its policy statement that the width of the Singapore dollar policy band and the level at which it is centered will be unchanged.

"The main story behind the GDP numbers is that recovery is broadening out... Most key services segments are back in expansion mode. And higher frequency data such as re-exports, container throughput and financial market turnovers are all trending higher," DBS Group's senior economist Irvin Seah said in a note to clients.

MTI said in its press release that the growth in services was largely supported by the finance and insurance, wholesale and retail trade, and transportation and storage sectors.

On Thursday, the Department of Statistics released data that showed August retail sales rose at their fastest pace in 17 months, in a further sign that consumer sentiment is on the mend following two years of declining receipts.

Singapore's economy began recovering in the fourth quarter of 2016 amid a turnaround in the global electronics industry, and the government expects overall growth this year to be the fastest in three years at between 2% and 3%.

Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp., said Singapore's growth for the full year could exceed the official forecast, given the expansion of 3.3% for the first nine months of the year.

"While manufacturing is likely to decelerate in 4Q17...the broadening growth drivers in services is reassuring," she said.

Manufacturing accounts for about 20% of Singapore's GDP, while the services sector contributes around 70%.

As for the central bank's future monetary policy stance, Ling said she was surprised by the dovish tone of MAS' statement and recommends keeping a close watch on labor market conditions in Singapore for signs of inflationary pressures.

Singapore's headline inflation averaged 0.5% year-on-year in July and August, down from 0.8% during the April-to-June period, according to MAS. Core inflation, which excludes the costs of private road transport and accommodation, was 1.5% during the two months compared to 1.6% in the second quarter.

"The window for any MAS monetary policy adjustment remains open in April and October 2018 depending on how the economic and price stability picture evolves over the next six months, especially with the G7 central banks increasingly jumping on the policy normalization bandwagon," Ling said.

--Kevin Lim

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