Singapore tops growth forecast, MAS stands pat

Here's why Singapore's economy is 'doing ok'

Singapore's economy grew at a faster-than-expected pace in the first quarter, government data showed on Tuesday, even as the central bank surprised markets by announcing no change to monetary policy.

Gross domestic product (GDP) grew an annualized 2.1 percent in the three months to March from the year-ago period, stronger than the 1.8 percent forecast in a Reuters poll and after expanding by the same margin in the fourth quarter.

Quarter on quarter, growth edged up 1.1 percent, also beating the 0.5 percent estimate but much lower than the 4.9 percent expansion in the previous quarter.

The manufacturing sector was the main drag on growth. Industrial production in January and February shrank on average by about 1.2 percent from a year earlier, while a survey of purchasing managers showed manufacturing activity shrank in March for a fourth straight month.

"It's been a pretty dismal picture as far as exports are concerned. For an economy to come up with positive growth solely driven domestic demand, which is the challenges these days for advanced economies, Singapore seems to be doing okay,"Taimur Baig, chief economist for Asia at Deutsche Bank, told CNBC.

The Monetary Authority of Singapore, the country's central bank, said GDP is on track to grow 2-4 percent for the full year and pledged will maintain the policy of modest, gradual appreciation of the Singapore dollar.

The central bank manages monetary policy by letting the Singapore dollar rise or fall against a basket of major currencies within an undisclosed trading band – this is called the Singapore dollar nominal effective exchange rate, or NEER.

People walk near the Singapore Flyer in Singapore
Nicky Loh | Bloomberg | Getty Images

The Singapore dollar jumped on the news, strengthening to 1.3625 against the U.S. dollar from 1.3720, or by 0.7 percent.

The wealthy city state faces slowing inflation and sluggish global demand that have put pressure on its currency, which fell to a four-and-a-half year low against the greenback last month.

Baig says the government is managing economic headwinds by "keeping the labor market tight, getting employment creation going and not create too much instability due to market volatility."

"I think Singapore is trying to thread all those needles and they've succeeded pretty well. We've seen an orderly easing of property markets in the last couple of years that hasn't taken down the economy; construction is still adding positively and that will continue given the large private sector projects they have in place both in housing and transportation," he said.

"[But] manufacturing will not be that great this year given that it is highly correlated with the exports," Baig added.

According to Tim Condon from ING, the slowdown in sequential growth on quarter came mostly from the services sector but the better than expected overall performance has him revising full-year growth a notch higher.

"The data lead us to revise our full-year GDP growth forecast to 2.9 percent from 2.8 percent," he said in a note.

MAS done?

When the MAS surprised markets with an unscheduled policy easing in January, it stoked concerns that deflationary risks to the economy brought on by a collapse in oil prices were worse than expected, with many analysts penciling more moves to come.

But analysts say that's looking less likely now, given the rosier forecast by the MAS, which upgraded its assessment of the global economy to "improved slightly" from uneven and mixed in its January statement.

"We view the tone of today's statement as reducing further the risk of an additional policy change in October, and would only expect additional changes in the event of a significant darkening in the growth outlook – unlikely, in our view," analysts at Barclays said in a note.

According to Daniel Martin, senior Asia economist of Capital Economics, MAS comments imply that the loosening in January " was enough to stave off the risk of deflation becoming entrenched."

"Given the MAS's lingering concerns about medium term inflation prospects, it seems safe to say that it will not be loosening policy again any time soon. And by the time of its next scheduled policy meeting in October, inflation will be creeping back up and the global economy should have gained a stronger footing. A prolonged hold looks to be the most likely course," he wrote in a note.