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macroeconomic

ISSN 0219-8908

Published in April 2012

Economic Policy Group Monetary Authority of Singapore

http://www.mas.gov.sg

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanised, photocopying, recording or otherwise, without the prior written permission of the copyright owner except in accordance with the provisions of the Copyright Act (Cap. 63). Application for the copyright owner's written permission to reproduce any part of this publication should be addressed to:

Economic Policy Group Monetary Authority of Singapore 10 Shenton Way MAS Building Singapore 079117

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Monetary Authority of Singapore Economic Policy Group

Contents

Preface i

Highlights ii-iii

Monetary Policy Statement iv-v

1 Macroeconomic Developments

1.1 External Developments 2

1.2 Domestic Economy 6

1.3 Macroeconomic Policy 15

2 Wage-Price Dynamics

2.1 Labour Market Conditions 24

2.2 Consumer Price Developments 27

3 Outlook

3.1 External Outlook 34

3.2 Outlook for the Singapore Economy 39

Box A: The Short-term Wealth Effects of Property and Stock Prices 49

in Singapore

3.3 Labour Market 52

3.4 Inflation 55

3.5 Assessing the Macroeconomic Policy Mix 59

Special Features

Special Feature A: Wages and Export Prices in China: Implications for 68

Global Inflation

Box B: Has China Reached its Lewisian Turning Point? 71

Special Feature B: Product Price Targeting—A New Improved Way of 78

Inflation Targeting

Statistical Appendix 82

List of Selected Publications 91

Macroeconomic Review, April 2012


LIST OF ABBREVIATIONS

ACU Asian Currency Unit

ASEAN Association of Southeast Asian Nations

BCA Building and Construction Authority

BEA US Bureau of Economic Analysis

COE Certificate of Entitlement

CPF Central Provident Fund

CPI consumer price index

CSP community, social & personal

DBU Domestic Banking Unit

DLI Domestic Liquidity Indicator

ECB European Central Bank

EIA Energy Information Administration

EPG Economic Policy Group

EU European Union

FAO Food and Agriculture Organisation of the United Nations

FDI Foreign Direct Investment

FI Fiscal Impulse

GFCF Gross fixed capital formation

GST goods and services tax

HDB Housing Development Board

IEA International Energy Agency

IMF International Monetary Fund

IPI import price index

IPO Initial Public Offering

ISM Institute of Supply Management

IT information technology

m-o-m month-on-month

NIEs newly-industrialised economies

NEER nominal effective exchange rate

NODX non-oil domestic exports

OECD Organisation of Economic Cooperation and Development

OPEC Organisation of the Petroleum Exporting Countries

PMI Purchasing Managers’ Index

q-o-q quarter-on-quarter

REER real effective exchange rate

SAAR seasonally-adjusted annualised rate

SIBOR Singapore interbank offered rate

SOR swap offered rate

WTO World Trade Organisation

WTI West Texas Intermediate

y-o-y year-on-year

Preface i


Preface

The Macroeconomic Review is published twice a year in conjunction

with the release of the MAS Monetary Policy Statement. The Review

documents the Economic Policy Group’s (EPG) analysis and

assessment of macroeconomic developments in the Singapore

economy, and shares with market participants, analysts and the wider

public, the basis for the policy decisions conveyed in the Monetary

Policy Statement. It also features in-depth studies undertaken by EPG

on important economic issues facing Singapore.

The Review was edited by Associate Professor Peter Wilson, and

continues to feature our collaborations with academics.

We are pleased to have Professor Jeffrey Frankel of Harvard Kennedy

School write about product price targeting in Special Feature B of this

issue.

The data used in the Review were drawn from the following

government agencies, unless otherwise stated: BCA, CPF Board, DOS,

EDB, HDB, IE Singapore, LTA, MOF, MOM, MTI, STB and URA.

The Review may be accessed in PDF format on the MAS website:

http://www.mas.gov.sg/publications/macro_review/index.html.

The Review may also be purchased at major bookstores, online

(http://asp.marketasia.com.sg/Spore/sporeindex.asp), or on an annual

subscription basis (details can be found on the last page).

ii Macroeconomic Review, April 2012


Highlights Since the last Review, global economic growth has slowed further—the soft patch witnessed in the early

part of 2011 persisted into the second half of the year, although growth patterns were divergent across

regions. In the Eurozone, sovereign debt worries precipitated a region-wide economic contraction, while

growth in Asia-ex Japan slipped on faltering external demand and disruptions to supply chain networks.

Resilient domestic demand, however, buffered the impact on most ASEAN economies. The US economy

also continued to recover, with sustained consumer spending providing a lift to growth. In line with the

general pullback in external demand, the Singapore economy experienced a further consolidation in

trade-related activities in the second half of 2011, with the manufacturing sector bearing the brunt of the

slowdown. However, underlying support from domestic and regional-oriented services partly offset the

contraction, resulting in a relatively mild decline in overall GDP growth compared to previous downturns.

Chapter 1 begins with an overview of recent developments in both the external environment and

domestic economy. It also contains a section that traces the evolution of Singapore’s trade balance over

the last decade from an expenditure perspective, examining the consumption, production and capital

goods components in greater detail. Notably, Singapore’s trade balance has been fairly robust over the

last decade. In particular, the surplus in the production balance has increased, underpinned by a shift

towards higher value added production in the pharmaceutical and petrochemical industries. Moreover,

exports of capital goods have surged over the past two years, underlining Singapore’s rising prominence

as a global and regional manufacturing hub in areas such as precision engineering and aircraft

components.

Chapter 2 looks at recent trends in the labour market and prices. In 2011, overall job creation remained

strong but was unevenly distributed between the domestic and export-oriented sectors. While the

construction and services sectors both enjoyed robust employment gains, the manufacturing sector saw

retrenchments towards the turn of the year. The confluence of a mild economic downturn amid a

still-tight labour market caused both wage growth and productivity to moderate, with the former exerting

some restraint on the increase in unit labour costs. Nevertheless, consumer price inflation remained

persistent as the pass-through of earlier cost increases picked up, even as domestic demand conditions

held firm. Meanwhile, imported inflation came in slightly stronger than anticipated, stemming from some

temporary weakness in the exchange rate towards end-2011, as well as increasing oil prices arising from

ongoing geopolitical events.

Chapter 3 focuses on the outlook for the external and domestic economies, against the backdrop of

receding tail risks and a tentative improvement in the near-term prospects for the US. The global

economy is expected to resume a steady, though sub-par growth path in 2012, as a result of continuing

headwinds arising from public and private sector deleveraging in the advanced countries. As such,

Singapore is likely to experience a modest expansion of 1–3% this year, with significant upsides capped by

lingering uncertainties in the global economy. In particular, trade-related activities could see a slower

upturn, compared with the more sanguine prospects for the domestic-oriented sectors. At the same time,

domestic supply constraints are likely to remain tight and geopolitical tensions will keep global oil prices

elevated. Together, these factors will support further increases in domestic costs and prices, though the

pace will ease from the high seen earlier this year as the output gap narrows and stabilises.

Looking further into the medium-term, the resource constraints faced by Singapore will become

increasingly binding, and the economy would need to rely less on labour force expansion and more on

productivity improvements for growth. In Chapter 3, the different phases of these supply-side induced

adjustments are discussed. Taking into account this ongoing medium-term restructuring as well as cyclical

developments in the economy, the macroeconomic policy stance was kept on a broadly tightening bias.

The tighter monetary policy stance is expected to temper, but not fully offset, the pass-through of

Highlights iii


supply-side cost increases, while the FY2012 Budget focused on medium-term initiatives aimed at building

the long-term capacity of the economy, strengthening the structure of social support, and alleviating

frictional costs during the economy’s transition.

Heightened activity in the local stock and property markets in recent years has raised questions about the

wealth effects of these assets on consumer expenditure, as seen in other countries such as the US, UK and

Australia. In Box A, we take a new approach to this issue in Singapore using a robust time-series

econometric approach that captures both the short-run and long-run effects of asset price changes,

as well as asymmetries in the behaviour of these asset prices. We find that neither stock nor property

prices have a significant impact on consumer expenditure in Singapore in the short term, and these results

are consistent across both quarterly and monthly frequencies.

To complete this Review, we highlight two special features centred on global economic issues, which are

particularly relevant for open economies. Special Feature A considers how the evolution of China’s wage

and productivity dynamics has affected global inflation outcomes over the last decade, by analysing the

pass-through of its labour costs to import prices in Hong Kong and Singapore. The results suggest that

strong wage growth in China has indeed had a significant impact on the import prices of the two major

trading centres, after controlling for the robust productivity gains in the manufacturing sector.

The implication is that if China’s labour costs continue to rise and the Lewisian turning point is reached,

whereby the supply of rural labour declines significantly, then importing countries could face higher costs

than in the past, in the absence of appropriate monetary policy responses.

Finally, this Review ends with a Special Feature by Professor Jeffrey Frankel of the Harvard Kennedy School

entitled, “Product Price Targeting—A New Improved Way of Inflation Targeting”. In this timely conceptual

piece, Professor Frankel proposes Product Price Targeting (PPT) as an alternative approach to

conventional inflation targeting which uses a broad output-based price index as the anchor for monetary

policy. PPT has the advantage of being robust with respect to terms-of-trade shocks and is, therefore,

appropriately designed for countries where these shocks are a source of macroeconomic instability,

particularly those that specialise in the export of oil and gas, copper, and coffee.

The next issue of the Review will be released in October 2012.

Economic Policy Group

Monetary Authority of Singapore

30 April 2012

iv Macroeconomic Review, April 2012


13 April 2012

Monetary Policy Statement

INTRODUCTION

1. MAS maintained the S$NEER policy band on a modest and gradual appreciation path in the last

policy review in October 2011. However, the slope of the policy band was reduced as economic activity

was expected to slow, and hence ease the tightness in the labour market and alleviate core inflationary

pressures.

Chart 1

S$ Nominal Effective Exchange Rate (S$NEER)

2. Over the last six months, the S$NEER was largely in the lower half of the policy band. It

weakened in November 2011 due to heightened global risk aversion arising from the sovereign debt

crisis in the Eurozone. However, it has since appreciated to around the mid-point of the policy band as

investor sentiment picked up following improved macroeconomic data from the US and indications of

some stabilisation in the Eurozone. The domestic three-month interbank rate rose to 0.50% in

November, before falling to 0.38% in December, where it has remained since.

OUTLOOK FOR 2012

3. The Singapore economy has gained some momentum since the beginning of this year. According

to the Advance Estimates released by the Ministry of Trade and Industry today, Singapore’s GDP

expanded by 9.9% on a quarter-on-quarter seasonally adjusted annualised basis in Q1 2012, following

the 2.5% contraction in the preceding quarter. This was underpinned by a turnaround in IT-related

activities as electronics manufacturing and trade recovered from the supply disruptions late last year.

Financial services grew more rapidly, while the tourism industry continued to perform well on the back

of resilient regional demand.

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Monetary Policy Statement v


4. The outlook for the global economy remains subdued, but the most significant risks have been

contained. In the US, business sentiments have improved, and the incipient recovery of the labour

market is supporting private consumption. Although the Eurozone is still likely to slip into a recession

in 2012, tail risks have receded following the ECB’s longer-term refinancing operations (LTRO)

programme. Meanwhile, growth in Asia ex-Japan will continue to be held up in part by domestic

demand, even as export growth remains muted. Against these developments, the Singapore economy

will experience modest growth of 1-3% in 2012.

5. With economic activity turning out somewhat stronger than anticipated in Q1 2012 and resource

markets tightening further, core inflationary pressures have persisted. MAS Core Inflation, which

excludes private road transport and accommodation costs, rose from 2.4% in Q4 2011 to 3.2% in the

first two months of 2012. This reflected a more rapid pass-through of higher wage costs to prices of

some consumer services. Meanwhile, CPI-All Items inflation moderated from 5.5% in Q4 2011 to 4.7%

in January-February. This was mainly due to the smaller increase in COE premiums relative to a year

ago.

6. Looking ahead, external inflationary pressures are likely to be sustained, largely due to higher oil

prices. Domestically, the labour market remains tight. The pass-through of costs to consumers is

therefore likely to continue, though at a reduced pace. Car prices could also rise further in response to

the tight COE supply, especially if car de-registrations remain at current low levels

7. CPI-All Items inflation and MAS Core Inflation have come in stronger than expected since

October 2011 and will remain elevated over the next few months, before easing over the remaining

course of this year. MAS is revising the forecast for MAS Core Inflation from 1.5-2% to 2.5-3% for 2012.

The forecast for CPI-All Items inflation in 2012 will also be raised from 2.5-3.5% to 3.5-4.5%.

Accommodation and COE costs will together account for as much as half of CPI-All Items inflation in

2012.

MONETARY POLICY

8. The tail risks in the key industrialised economies have receded, but global growth is likely to

remain below trend in the near term. Against this backdrop, the Singapore economy is expected to

grow at a modest pace in 2012. Core inflationary pressures have persisted, but will likely ease in the

latter half of the year.

9. MAS will therefore continue with the policy of a modest and gradual appreciation of the S$NEER

policy band. The slope will be increased slightly, and there will be no change to the level at which the

band is centred. MAS is also restoring a narrower policy band. This policy stance will help anchor

inflation expectations, ensure medium-term price stability, and keep growth on a sustainable path.

Chapter 1 Macroeconomic

Developments

2 Macroeconomic Review, April 2012


1.1 External Developments

Slowdown in the Global Economy

Growth in the Eurozone and Asia decelerated

in late 2011 although the US saw a pickup.

The soft patch in global economic growth witnessed in

the early part of 2011 persisted into the second half of

the year, as worries that the Eurozone sovereign debt

crisis would deteriorate rapidly spooked global financial

markets and reduced risk appetite. The fear of a

disorderly default in Greece triggered contagion across

the Eurozone periphery, leading to funding stresses and

precipitating a region-wide economic contraction in

late 2011. (Table 1.1)

Flagging demand from the Eurozone in turn dealt a

blow to Asia’s exports, which were further aggravated

by severe floods in Thailand. The inundation disrupted

the regional automobile and electronics production

chains again, after the Tohoku earthquake struck

earlier in the year. (Chart 1.1) As a result, Japan’s

economic output fell in Q4 2011 while growth in Asia

ex-Japan as a whole slowed sharply.

The US was the only key trading partner of Singapore to

register faster growth in the second half of 2011,

even though full-year growth was still much lower than

in 2010. Corresponding slowdowns were observed in

Singapore’s other key markets, bringing overall external

GDP growth down to 4.3% in 2011 from 6.3% in the

preceding year, and marking a hiatus in the recovery of

the world economy from the Global Financial Crisis.

(Table 1.1)

US economic growth was supported

by domestic demand …

Following a modest 1.8% q-o-q SAAR rise in Q3 2011,

US real GDP increased by 3.0% in Q4. Household

spending fuelled the advance, as consumers shook off

negative sentiment and took on more debt to spend on

durable goods. (Chart 1.2) Private consumption

increased at a 2.1% annualised rate during the quarter,

supported by an average 1.7% rise in real incomes.

The shortfall was financed through new consumer

credit, which expanded by 6.9% q-o-q SAAR in Q4,

thus helping to keep the savings rate steady at 4.5%.

Table 1.1

GDP Growth (%)

2010 2011 2011

Q3 Q4

q-o-q SAAR

Total* 6.3 4.3 3.8 1.5

G3* 2.9 1.1 2.4 0.6

US 3.0 1.7 1.8 3.0

Eurozone 1.9 1.5 0.6 −1.2

Japan 4.4 −0.7 7.1 −0.7

Asia ex-Japan* 8.2 5.8 4.5 1.9

Hong Kong 7.0 5.0 0.5 1.5

Korea 6.3 3.6 3.4 1.3

Taiwan 10.7 4.0 −0.2 −0.6

Thailand 7.8 0.1 3.4 −36.4

Philippines 7.6 3.7 3.3 3.5

y-o-y

Indonesia 6.2 6.5 6.5 6.5

Malaysia 7.2 5.1 5.8 5.2

China 10.4 9.2 9.1 8.9

India 8.5 7.1 6.9 6.1

Source: CEIC and EPG, MAS estimates

* Weighted by shares in Singapore’s NODX.

Chart 1.1

Electronics and Automotive Production

in Asia*


* Average of output levels in Japan, Korea, Malaysia,

Taiwan and Thailand.

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Macroeconomic Developments 3


Fixed investment growth in the US economy

moderated to a more sustainable pace in Q4, growing

by 6.3% q-o-q SAAR after a robust 13% in the previous

quarter. Firms’ spending on non-residential structures

stalled, but gross capital formation surged as

businesses stocked up to meet an increase in new

orders. (Chart 1.3) With home sales on an upward

trend and housing starts at just one-third of their peak

in 2005, residential construction outlays increased by

11.6% q-o-q SAAR in Q4 2011—the fastest rate since

Q2 2010.

… while the Eurozone and Japan were hurt

by the sovereign debt crisis and

natural disasters, respectively.

In contrast to the US, Eurozone economic growth was

on a downward trajectory throughout 2011. (Chart 1.4)

The region’s debt crisis flared up again in August 2011,

and threatened to spread to the larger economies

of Spain and Italy, where sovereign debt yields rose

to unprecedented levels. The ensuing crisis of

confidence culminated in a real GDP contraction of

1.2% q-o-q SAAR in Q4 2011, owing primarily to a

sentiment-driven pullback in domestic demand.

Final consumption expenditure retracted by even more

than aggregate output across both the core and

peripheral economies. The ongoing budgetary

tightening to meet pre-committed fiscal deficit targets

acted as a further drag on growth, although lower

domestic absorption reduced imports and led to an

improvement in net exports.

After growing by 7.1% q-o-q SAAR in Q3 2011,

the Japanese economy contracted by 0.7% in Q4.

(Chart 1.5) Following the rebound from the tsunami-

induced downturn, exports plummeted again by nearly

12%, as demand from the Eurozone fell and the Thai

floods led to shortages of key components used by

upstream Japanese automobile and electronics

manufacturers. Nevertheless, private domestic

demand partially mitigated the effects of these external

shocks, as firms increased capital expenditures by

21% q-o-q SAAR in Q4 and household spending

remained resilient.

Growth in Asia ex-Japan slipped on weaker external

demand as well as supply disruptions …

As anticipated in the October 2011 issue of the Review,

Asia ex-Japan was impacted by faltering external

demand from the industrialised economies during the

Chart 1.2

US Private Consumption and

Consumer Confidence

Source: BEA and Conference Board

Chart 1.3

US Inventories and New Orders

Source: BEA and ISM

Chart 1.4

Contribution to Eurozone’s GDP Growth

Source: Datastream

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

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Consumer Confidence Index (RHS)

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Change in Inventories (LHS)

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Domestic Demand Net Exports GDP



second half of 2011. The fall-off in the region’s exports

was compounded by supply chain disruptions arising

from the extensive floods in Thailand, as well as a

measured slowdown in the Chinese economy.

On average, real GDP growth in Asia ex-Japan was cut

to 1.9% q-o-q SAAR in Q4 2011 from 4.5% in the

preceding quarter.

China is in the midst of a consolidation in both the

export and property sectors. Real GDP growth

moderated to 8.9% y-o-y in Q4 from 9.1% in Q3 as

industrial production, fixed asset investment and

exports all decelerated in the last quarter of the year.

Retail spending was the exception, increasing by

18% y-o-y in Q4 on the back of previous strong wage

growth and income tax cuts, reflecting the emerging

importance of consumption as an independent growth

driver. (Chart 1.6) In 2011, consumption expenditures

accounted for 4.8% points of China’s overall GDP

growth of 9.2%, close to the 5.0% points contributed by

investment. Net exports, in contrast, subtracted 0.5%

point from growth, as overall import growth outpaced

export growth due to stronger domestic demand.

(Chart 1.7)

Being highly dependent on both global trade and the

Chinese economy, the NIEs lost some momentum late

last year. Domestic demand moderated in tandem with

the export slowdown, with private consumption

growth falling by 2.0% points, on average, in Q4 2011.

While Korea and Hong Kong fared somewhat better,

Taiwan entered into a mild recession as the economy

contracted for two consecutive quarters in Q3 and

Q4 2011.

… but resilient domestic demand buffered the

impact on most ASEAN economies.

In comparison, the ASEAN economies (except Thailand)

enjoyed relatively firm growth in H2 2011. Although

the commodity exporters suffered from softer prices

and the electronics producers were exposed to the

downswing in the electronics cycle, broad-based

strength in domestic demand bolstered economic

activity. For example, strong public spending

contributed significantly to economic growth in

Malaysia and the Philippines. The Indonesian economy

also benefited from an upturn in investment, driven in

part by buoyant FDI inflows.

Chart 1.5

Contribution to Japan’s GDP Growth

Source: CEIC

Chart 1.6

China’s Retail Sales and

Nominal Wage Growth

Source: CEIC

Chart 1.7

Contribution to China’s GDP Growth

Source: CEIC

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

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Private Demand

Public Demand

Net Exports

GDP

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

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GDP

2011



The Thai economy shrank by 9.0% y-o-y in Q4 2011 due

to strongly negative net exports, as production at

flood-affected industrial estates was brought to a

virtual standstill. (Chart 1.8) The floods also caused a

shortage of domestic goods and crippled transport

networks which, together with heightened consumer

caution, resulted in a fall in private consumption.

Investment also declined alongside a deterioration in

business confidence and interruptions to economic

activity.

Global inflationary pressures subsided.

Global inflation moderated in H2 2011, as energy prices

stabilised and economic activity slowed. The fall

in inflation was steepest in China and India, reversing

the run-up experienced in 2010. (Chart 1.9)

These economies benefited most from the recent food

price disinflation, as food items comprise a larger

proportion of their consumption baskets. In China,

the decline in food inflation could be attributed to

improved harvests towards the end of last year and

stabilising pork prices. In India, tighter monetary policy,

increased food subsidies, and weakening investment

helped to alleviate price pressures.

In the ASEAN countries, inflation remained relatively

high, although it has started to trend down from recent

peaks, particularly in Indonesia. This deceleration was

largely a consequence of easing commodity prices as

well as favourable base effects. However, core

inflation remained sticky due to capacity constraints

and relatively tight labour markets.

In the US and Eurozone, headline inflation began to

moderate from September 2011, albeit more slowly

compared to Asia ex-Japan. (Chart 1.10) Nevertheless,

core inflation in Q4 rose slightly above 2% y-o-y in the

US and was unchanged at 1.6% in the Eurozone.

In Japan, headline inflation fell to −0.3%, as base effects

from previous increases in tobacco taxes and insurance

premiums dissipated.

Chart 1.8

Contribution to Thailand’s GDP Growth

Source: CEIC

Chart 1.9

China and India’s Headline

and Food Inflation

Source: CEIC

Chart 1.10

G3 and Asia ex-Japan Headline Inflation*

Source: CEIC

* Weighted by 2010 nominal GDP.

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

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Private Consumption

Government Consumption

GFCF

Net Exports

Statistical Discrepancy

Change in Stocks

GDP

2010 Q3 2011 Q3 2012Q1

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12

16

20

24

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OY

China

India (WPI)

China (Food)

India (Food)

2010 Jul 2011 Jul 2012

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Asia ex-Japan

G3

Feb



1.2 Domestic Economy

H2 2011: A Further Downshift in Activity

Weak trade-related activities weighed on the

Singapore economy in H2 2011.

Amid softening external demand and regional

supply-side disruptions, the Singapore economy

weakened further in the second half of 2011. Excluding

the volatile pharmaceutical segment, activity in the

domestic economy slipped by 1.0% on a

q-o-q SAAR basis in Q3 and fell a further 3.5% in Q4,

following a 2.1% contraction in Q2. (Chart 1.11)

Nevertheless, the fall in activity was comparatively

mild, sliding 1.7% over the last three quarters from the

peak in Q1 2011, compared to an average contraction

of 5.5% in previous downturns.

The manufacturing sector bore the brunt of the

slowdown, recording three straight quarters of

negative growth. (Table 1.2) The electronics sector

was particularly weak, suffering a double-digit

contraction in production in the same period, following

widespread output cuts across the IT production chain.

The backdrop for this was the downturn in the

electronics industry worldwide, which saw global chip

sales declining by 2.0% q-o-q SA in Q4, following a 2.7%

drop in Q3. In addition, the US Tech Pulse Index, which

tracks the health of the US technology sector,

continued to sink deeper into negative territory in Q3

and Q4 last year, as production slowed in line with

declining shipments.1 (Chart 1.12) The industry was

also buffeted by supply shocks, including massive

flooding in Thailand in H2 2011 which created

temporary shortages in hard disk-related products,

curbed PC shipments and hence demand for

semiconductor chips.

Chart 1.11

Singapore’s GDP Growth

* Advance Estimates.

** EPG, MAS estimates.

Table 1.2

Singapore’s GDP by Clusters

Source: EPG, MAS estimates

1

The US Tech Pulse Index, compiled by the Federal Reserve Bank of San Francisco, is an index of coincident indicators of

activity in the US IT sector. The indicators used are investment in IT goods, consumption of personal computers and

software, employment in the IT sector as well as industrial production of, and shipments by, the technology sector.

The index extracts the common trend that drives these series.

2009 2010 2011 2012Q1*

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GDP YOY GDP ex-Pharma QOQ SAAR**

Sectors2011

Q1 Q2 Q3 Q4

GDP ex-Pharma

Manufacturing

ex-Pharma

Regional-oriented

Services

Domestic-oriented

Services

<-5% < 0% > 0% > 5%

GDP QOQ SAAR (%)



The weakness in the electronics cluster spilled over to

some supporting industries. Growth in the domestic

precision engineering cluster fell by 11.6% q-o-q SAAR

in Q4, as IT companies worldwide held back on

machinery and equipment investments, in the face of

growing pessimism over the near-term business

outlook. Trade-related services were affected as well,

with slower growth in air and sea transport in the

second half of the year.

However, there was underlying support from

domestic and regional-oriented services.

Unlike previous episodes of cyclical weakness where

broad-based contractions across the domestic

economy were observed, several key services segments

remained relatively strong in the second half of 2011,

boosted by resilient regional and domestic demand.

(Table 1.2)

Despite heightened uncertainties in the external

environment, the tourism cluster continued to be

anchored by firm visitor inflows from the major Asian

economies in H2 2011. Monthly tourist arrivals,

which were underpinned by steady inflows from China,

India and Japan, remained above 1.11 million on

average throughout the second half of last year,

higher than the 1.08 million recorded in H1 2011.

Correspondingly, there was strong demand for hotel

accommodation, with average room rates reaching a

historic high of S$260 in Q4 and hotel occupancy rates

kept high at 86%.

Meanwhile, the domestic-oriented sectors were

buoyed by resilient consumer spending. While overall

retail sales contracted by 1.8% q-o-q SA in Q3 due

to a reduction in vehicle quotas, it rose by 1.3%

in Q4, supported by strong discretionary spending.

(Chart 1.13) In particular, retailers reported higher

sales of big-ticket items like household furniture as well

as lifestyle products such as electronic gadgets.

The finance & insurance sector recorded firm

growth, supported by intermediation activities.

The finance & insurance sector continued to grow

steadily in H2 2011 despite heightened risk aversion.

The domestic business lending segment proved to be a

critical anchor, contributing the bulk of gains in

financial intermediation, as companies continued to

Chart 1.12

US Tech Pulse Index

Source: Federal Reserve Bank of San Francisco

Chart 1.13

Overall Domestic Retail Sales

2000 2002 2004 2006 2008 2010

-60

-40

-20

0

20

fro

m H

isto

ric

al

Av

era

ge

% D

ev

iati

on

of

12

-mth

Gro

wth

Ra

te

2011Dec

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

92

96

100

104

108

Ind

ex

(2

01

0=

10

0),

SA

-24

-12

0

12

24

0

-24

QO

Q S

A %

Gro

wth

Retail Sales Index (LHS)

Overall Retail Sales (RHS)

Vehicle Sales (RHS)



rely on bank financing to fund both their daily

operations and longer-term investments. Business loan

growth was broad-based, underpinned by the business

services, manufacturing and commerce segments.

This reversed the dominance of consumer lending in

the DBU segment in 2010, when business lending

accounted for less than half of the expansion in

non-bank lending. (Chart 1.14)

As for offshore loans, growth in regional lending

strengthened in the latter half of 2011, posting a

7.0% q-o-q rise in Q4, following a 13% increase in Q3.

This was higher than the average quarterly gain of 4.4%

in the first two quarters of the year. In contrast,

lending to the Americas and Europe remained sluggish.

(Chart 1.15)

Meanwhile, the sentiment-sensitive cluster suffered on

the back of further fund outflows from the region.

The outflows were estimated to be about US$17 billion,

more than twice the US$7.4 billion outflows in the

earlier half of the year.2 The risk-off environment,

in turn, dampened activities in the stock broking

and investment advisory segments. Demand for

investment-linked life insurance also tapered off as

consumers grew more risk-averse amid heightened

volatility in financial markets.

Chart 1.14

Contribution to DBU

Non-bank Loans Growth

Chart 1.15

ACU Non-bank Lending

GDP in 2011: An Expenditure Perspective

GDP growth was anchored by strong domestic

business and consumer spending.

Notwithstanding the downshift in domestic growth

momentum in H2 2011, GDP still expanded by 4.9% for

the full year, on the back of the 14.8% recorded in

2010.3 Private consumption was particularly robust,

with its contribution to growth almost doubling from

17% in 2010 to 31% in 2011. At the same time,

business capital expenditures remained healthy, with

continued fixed investments in industrial machinery

and transport equipment. Meanwhile, inventory

restocking contributed about a quarter to GDP growth,

reflecting in part the accumulation of stocks following

the series of supply-side disruptions last year.

2 According to data from EPFR Global.

3 Excluding pharmaceuticals, GDP is estimated by EPG to have grown by 4.0% in 2011, following a 13.8% expansion in 2010.

H1 H2 H1 H2

0

10

20

30

40

YO

Y G

row

th

% P

oin

t C

on

trib

uti

on

to

Business Consumer

2010 2011

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

100

120

140

160

180

Ind

ex

(Q

1 2

01

0=

10

0)

East Asia

The Americas & Europe



In contrast, the export sector saw a more subdued performance, in line with the weakening of demand

from the advanced economies. Overall net exports fell

by 1.1% in 2011, following stellar growth of 37% in

2010, due mainly to slower goods trade. Unlike net

exports in services, which remained resilient and

continued to grow by 11% last year, net exports of

goods declined by 1.4% in 2011, after recording 25%

growth in 2010.

Abstracting from the cyclical weakness in merchandise

trade, net exports will continue to be underpinned by

the trade in goods, underscoring Singapore’s position

as a global and regional production hub. In fact,

the trade balance (defined here as net goods exports)

has averaged above 17% of nominal GDP since 2001,

three times the average of 6% in the late 1990s.

The next section traces the evolution of the trade

balance over the last decade in greater detail.

The composition of Singapore’s trade balance

has evolved over the last decade.

The non-oil trade balance in Chart 1.16 is split into

three broad categories—consumption, production and

capital goods. The consumption goods balance has

always been in deficit, given the lack of natural

resources or a sizeable agriculture sector in Singapore.

Consumption goods comprise food, beverages &

tobacco, manufactured goods and motor vehicles.

The production goods surplus reflects Singapore’s

position as a manufacturing hub, and includes

chemicals, pharmaceuticals and electronics.

The capital goods balance consists mainly of machinery

and industrial transport equipment.

Over the last decade, the size of the consumption

goods deficit has increased significantly, although it has

moderated somewhat from the peak in 2008 following

the Global Financial Crisis. (Chart 1.17) The growth of

the deficit was largely driven by the increase in imports

of consumer durables, alongside the rise in Singapore’s

population and income. However, its impact on the

overall trade balance was more than offset by the steep

increase in the production goods surplus.

Chart 1.16

Non-oil Trade Balance


Chart 1.17

Consumption Goods Balance


2003 2005 2007 2009 2011

-50

0

50

100

$ B

illi

on

Consumption Goods

Production Goods

Capital Goods

Non-oil Trade Balance

2003 2005 2007 2009 2011

-30

-25

-20

-15

-10

-5

0

5

$ B

illi

on

Food, Beverages & Tobacco

Manufactured Goods

Motor Vehicles

Others



The rise in the production goods surplus was driven in

part by the increasing prominence of the biomedical

sector in the 2000s. Pharmaceuticals’ share of the

trade balance edged up over the last decade due to the

rising value-added content of its exports.

(Chart 1.18) This was underpinned by the opening of

the GlaxoSmithKline, Lonza and Roche biologics plants

here in the last few years. The bulk of the active

pharmaceutical ingredients produced is exported to the

US and European markets.

Petrochemicals also increased its share of the trade

balance over time, rising from 15% in 2003 to 26% in

2010–11. New crackers from industry leaders such as

ExxonMobil Chemicals and Shell Chemicals had come

on-stream in recent years, enlarging and

complementing existing capacity. With a greater

proportion of feedstock sourced locally and a more

integrated and comprehensive production chain in

place in Singapore, the petrochemicals industry has

been able to reduce its reliance on imports.

The deficit in the capital goods balance shrank

gradually over the last decade. (Chart 1.19) In fact,

Singapore became a net exporter last year.

These changes reflect the rising importance of the

transport-related and precision engineering industries

in Singapore, with firms such as Rolls-Royce and

Applied Materials setting up their operations here.

In the marine-related segment, exports of rig-related

equipment and ships surged in the last two years,

buoyed by high oil prices as well as an ageing global

fleet. The industry has also continued to move up the

value chain, with local yards producing oil rigs that can

be deployed in deeper waters. The establishment of

specialised high-end component manufacturing

operations, including rudders, propellers and thrusters,

by global leading companies has provided a further

boost to the industry.

Chart 1.18

Production Goods Balance


Chart 1.19

Capital Goods Balance


2003 2005 2007 2009 2011

0

20

40

60

80

100

$ B

illi

on

Pharmaceuticals Petrochemicals Electronics

2003 2005 2007 2009 2011

-15

-10

-5

0

5

$ B

illi

on

Transport ex-Motor Vehicles

Machinery and Equipment

Others



Q1 2012: A Nascent Recovery

Domestic economic activity picked up in Q1 2012,

with the dissipation of negative external shocks.

Following three consecutive quarters of sluggish

performance, the Singapore economy posted an upturn

at the start of the year. The latest Advance Estimates

indicated that the economy rebounded by 9.9% q-o-q

SAAR in Q1 2012, reversing the 2.5% decline recorded

in Q4 2011. Excluding the volatile pharmaceutical

industry, the domestic economy grew by around 11%,

following three quarters of negative sequential growth.

The recovery was corroborated by EPG's monthly

Economic Activity Index, which pointed to a rebound at

the turn of the year.4 (Chart 1.20) The trade-related

sub-index, which has a 46% weight in the overall index,

experienced a sharp increase in early 2012.

The improvement in the trade-related cluster was

propelled by a strong turnaround in IT-related

activities, largely reflecting a normalisation in disk drive

production. Specifically, output in the data storage

segment, which was impacted by the Thai floods in Q4

last year, rebounded by 41% m-o-m SA on average in

Dec–Feb, following a 42% plunge in November 2011.

With the resumption of production in the region,

electronics re-exports rose by 3.6% q-o-q SA in Q4

2011, halting four quarters of decline, and recorded a

further 5.0% increase in Q1 this year. In contrast to the

expansion in the hard disk segments, the other key

segments of the electronics manufacturing cluster,

such as semiconductors, continued to languish,

dampened by an inventory overhang in the global

midstream supply chain.

Activity in the rest of the trade-related cluster also

continued to be fairly subdued amid tepid global

demand. In the transportation & storage sector,

container throughput slipped 0.3% m-o-m SA in March,

following a 2.1% uptick in February, and air cargo

volumes remained soft.

Chart 1.20

EPG’s Economic Activity Index

4 The Economic Activity Index (EAI) is a monthly composite index which traces the performance of the economy.

It aggregates a set of coincident and high-frequency indicators across the major sectors of the economy, weighted by their

economic importance.

2011 Apr Jul Oct 2012Feb

92

94

96

98

100

102

Ind

ex

(J

an

20

11

=1

00

), S

A

Overall EAI

EAI ex-Pharma

Trade-related ex-Pharma



Price and cost pressures

have came to the fore in the IT sector.

The export sector, particularly the IT industry,

was restrained by rising costs and falling prices.

Chart 1.21 highlights that Singapore’s non-oil domestic

exports had come under significant price pressures in

the past two quarters. The price effect, as indicated by

the orange bars, was the dominant factor weighing on

growth in H2 2011. A further decomposition suggests

that the fall in export prices was mainly caused by a

steeper-than-usual decline in prices of IT products.

This was because of the sharper price erosion in

semiconductor chips compared to final products,

reflecting the inventory glut in the midstream segment.

While there was a modest improvement in prices in Q1

2012, prices in certain pockets of the global IT industry,

particularly the memory segment, could continue to be

weighed down by excess capacity in the near term.

Notably, the export price erosion appears to be starker

in Singapore compared to the rest of the region.

Relative to other key players in Asia, Singapore fared

the worst in IT exports in nominal US$ terms, reflecting

its large exposure to the midstream component

segment. (Chart 1.22) However, in volume terms,

which exclude price and exchange rate effects,

Singapore’s export performance was comparable to

some of the other regional economies. (Chart 1.23)

Concomitantly, domestic IT manufacturers also had to

contend with pronounced cost pressures from tight

factor markets, including higher foreign worker levies

and rising input costs. Electricity prices climbed by a

hefty 17% last year, owing to the spike in global oil

prices.5

Chart 1.21

Decomposition of

Non-oil Domestic Exports Growth

Chart 1.22

Regional Electronics Exports (US$)

Source: CEIC

Chart 1.23

Regional Electronics Exports Volume

Source: CEIC

5 According to Energy Market Company, Monthly Trading Reports, December 2010 and December 2011.

2010 Q3 2011 Q3 2012Q1

-8

-4

0

4

8

12

QO

Q S

A G

row

th

% P

oin

t C

on

trib

uti

on

to

Price Effect (In US$)

Exchange Rate Effect

Volume Effect

Non-oil Domestic Exports

Aug Apr Aug Dec

90

100

110

120

130

Ind

ex

(A

pr

20

10

=1

00

), S

A

Singapore

Korea

Apr2010

Jan2011

China

Taiwan

Aug Apr Aug Dec

80

90

100

110

120

130

Ind

ex

(A

pr

20

10

=1

00

), S

A

Singapore

Korea

ChinaTaiwan

Apr2010

Jan2011



Services remained resilient.

The non manufacturing-linked services and regional-

oriented activities continued to fare well in Q1 2012.

Notably, the tourism industry started the year with

impressive gains, buoyed by double-digit growth in

visitor arrivals from major source markets, such as

China and Malaysia. Accordingly, overall arrivals grew

at its fastest pace in five years, reaching a new record

of 1.2 million on average each month in Jan–Feb 2012,

higher than the average of 1.1 million visitors in the

previous twelve months. (Chart 1.24) In line with

stronger visitor inflows, hotel occupancy rates rose

from 86% in Q4 to 90% on average in January and

February, while room rates remained close to the

record levels seen in late 2011. With the addition of

the Bayfront MRT station and new facilities in the

Integrated Resorts, such as the Maritime Experiential

Museum & Aquarium, activity in the other services

cluster also registered an uptick in Q1 2012.

Support from Asian demand was also reflected in

healthy credit demand from the region. ACU non-bank

loans extended to East Asia grew by 7.0% q-o-q

in Q1, unchanged from the preceding quarter.

At the same time, positive economic data from the US

and the steps taken to resolve the sovereign debt crisis

in the Eurozone bolstered business confidence.

Lending to the Americas and Europe rebounded by

1.9% m-o-m in March, following three straight months

of sequential declines. (Chart 1.25)

The somewhat promising start to 2012 in the US and

Europe also helped financial market sentiment. Within

the finance & insurance sector, average daily trading

volumes in the domestic bourse rose to 1.9 billion in Q1

2012, from 1.0 billion in Q4 2011. However,

the increase in activity was driven largely by trading in

penny stocks rather than higher-value blue chips,

as shown by the smaller 30% q-o-q increase in turnover

value compared to the 83% growth in volume terms.

(Chart 1.26) Business confidence also improved and

companies returned to the corporate debt markets to

raise funds. Reflecting this, S$-denominated debt

issuance rose to $9.2 billion, marking a 114% q-o-q

increase over the preceding quarter.6

Chart 1.24

Average Monthly Visitor Arrivals and

Hotel Occupancy Rate

* EPG, MAS estimates.

Chart 1.25

ACU Non-bank Lending Growth

Chart 1.26

Stock Market Average Daily Turnover

Source: Singapore Exchange

6 According to data from Bloomberg.

2010 Q3 2011 Q3 2012

0.8

0.9

1.0

1.1

1.2

1.31.3

Mil

lio

n,

SA

70

75

80

85

90

95

%,

SA

Visitor Arrivals (LHS) Occupancy Rate* (RHS)

Jan-Feb

2011 Mar May Jul Sep Nov 2012 Mar

-8

-4

0

4

8%

MO

M

The Americas & Europe

East Asia

2010 Q3 2011 Q3 2012Q1

-40

0

40

80

120

QO

Q %

Gro

wth

Volume

Value



At the consumer end, retail sales remained firm in

the first few months of the year, supported by a

recovery in vehicle sales. Vehicle sales rebounded by

an average of 7.6% m-o-m SA in Jan–Feb, after two

quarters of negative growth, as car dealers reported

higher luxury car sales following the introduction of

new European models. Over this period, the food &

beverage services sector also reported an average

increase of 2.6% m-o-m in their receipts, as more locals

and tourists dined at restaurants as well as other food

outlets.

Construction growth surged in Q1, boosted by a strong

pipeline of residential and non-residential projects.

Recent data for certified progress payments pointed to

a jump in residential building activities following the

strong take-up of Build-to-Order projects as well as

private condominium launches. (Chart 1.27) Ongoing

construction of major non-residential projects such as

the South Beach Complex and the Singapore University

of Technology & Design also supported growth.

Growth is expected to be modest in 2012.

Despite the rebound in Q1, the pace of recovery for the

rest of the year is expected to be relatively subdued.

With the upturn in the manufacturing sector attributed

largely to transitory drivers and with the weakness in

the electronics sector expected to persist, services will

account for most of the growth for the rest of the year.

This will be discussed in greater detail in Chapter 3.

Chart 1.27

Certified Progress Payments in the

Construction Sector


2011 Mar May Jul Sep Nov 2012

80

90

100

110

120

130

Ind

ex

(J

an

20

11

=1

00

), S

A

Non-residential

Residential

Other Construction & Works

Feb



1.3 Macroeconomic Policy

Macroeconomic policy in Singapore plays a

countercyclical role, while maintaining

a medium-term orientation.

Macroeconomic policy setting in Singapore continued

to be consistent with cyclical developments in the

economy, amid multiple shocks emanating from the

external environment. Chart 1.28 plots the Domestic

Liquidity Indicator (DLI) 7 and Fiscal Impulse (FI) 8

measure, which are proxies for the monetary and fiscal

policy stance respectively, against the output gap.

Points above the horizontal axis denote a positive

output gap and an expansionary policy stance, and vice

versa for points below the axis. A positive output gap

signals that output is above potential, leading to

inflationary pressures as the economy faces

bottlenecks in meeting demand. Conversely, a negative

output gap indicates that the economy is producing

below capacity, resulting in the easing of cost and price

pressures. Movements in the DLI and/or FI in the

opposite direction to the output gap indicate that

macroeconomic policy is countercyclical in the short

term.

The chart shows that macroeconomic policy in

Singapore has been expansionary during downturns in

the economy, including the Global Financial Crisis.

In 2010, the output gap turned positive as the economy

recovered decisively from the recession in 2009 to post

record growth. Appropriately, monetary and fiscal

stimuli were withdrawn. In 2011, the positive output

gap widened slightly, as full-year GDP growth remained

firm even as supply-side restructuring measures were

stepped up. The policy setting of a broadly tightening

bias was maintained to ensure that the economy

remained on a sustainable growth and inflation path in

the medium term.

Chart 1.28

DLI, FI and Output Gap


7 The DLI is a measure of overall monetary conditions, which reflects changes in the S$NEER and three-month domestic

interbank rate.

8 See the January 2002 issue of the Review for more details on the methodology used to calculate the FI measure.

1990 1995 2000 2005 2011-4

-2

0

2

4

6

-4

-2

0

2

4

6

% o

f G

DP

Contractionary

% o

f P

ote

nti

al G

DPExpansionary

-1.5

-1.0

-0.5

0.0

0.5

1.0 -4

-2

0

2

4

6

% C

han

ge o

ver

Pre

vio

us

Yea

r

Expansionary

% o

f P

ote

nti

al G

DP

Contractionary

FI Measure (LHS) Output Gap (RHS)DLI (LHS)



Monetary Policy

The appreciating exchange rate policy stance

was re-calibrated in 2011.

In April 2011, MAS tightened monetary policy for the

third time since April 2010 by re-centring the exchange

rate policy band upwards to slightly below the

prevailing level of the S$NEER. The policy band was

kept on a modest and gradual appreciating path.

In October 2011, MAS reduced the slope of the band,

but maintained its appreciating path. There was no

change to the level at which the band was centred.

Over the year, MAS kept the policy band at the wider

setting adopted in October 2010 to accommodate

continued volatility in international financial markets.

The S$NEER has largely been in the lower half of the

policy band since the October 2011 policy review.

Between end-October and end-November, the S$NEER

depreciated as risk aversion rose amid the sovereign

debt crisis in the Eurozone. (Chart 1.29) The regional

currencies similarly weakened against the US$.

(Chart 1.30) The turn of the year saw a fall in risk

aversion as global macroeconomic conditions

improved, and Eurozone authorities committed to

measures to ensure liquidity in the financial system.

This stemmed the downward pressures on the S$NEER,

and the exchange rate subsequently strengthened

to around the mid-point of the policy band

by end-January. Over the last six months from

October 2011 to March 2012, the S$NEER was largely in

the lower half of the policy band.

The S$REER depreciated in Q4 2011, but was still

about 8% higher than in Q1 2010.

The S$ real effective exchange rate (S$REER) is a

measure of the S$NEER adjusted for price differentials

between Singapore and its trading partners. As the key

(relative) price variable for an open economy,

it captures the domestic economy’s adjustment to

external demand shocks. Using the CPI as the price

deflator, the S$REER is estimated to have peaked in

Q3 2011 before falling by 2.4% in Q4 alongside the

Chart 1.29

S$NEER

Chart 1.30

Movements of Regional Currencies

against the US$

Jan Jan Jan Jan Jan Jan

95

100

105

110

115

120

Ind

ex (

5 J

an

2007=

100)

Appreciation

Depreciation

200920082007 20112010

Apr

2012

7-Oct 11-Nov 16-Dec 20-Jan 24-Feb

90

95

100

105

110

Ind

ex

(7

Oc

t 2

01

1=

10

0)

S$

Ringgit

20122011

RMB

Won

NT$

Baht

Yen

Rupiah

Appreciation of US$

6-Apr



depreciating S$NEER. (Chart 1.31) By the end of 2011,

the S$REER had risen by 7.9% since Q1 2010,

just before MAS embarked on the monetary policy

tightening cycle.

Liquidity conditions have tightened

since the beginning of 2012, driven largely by

exchange rate appreciation.

The DLI has been primarily driven by changes in the

exchange rate, given that domestic interest rates have

languished near the zero bound. From September to

December 2011, the DLI turned negative in line with

the depreciation of the S$NEER, following 17 months in

positive territory. (Chart 1.32) This easing in overall

liquidity conditions late last year was nevertheless

temporary, as the subsequent strengthening in

the S$NEER resulted in a positive DLI once again in

Jan–Mar 2012.

The three-month S$ domestic interbank rate rose from

0.44% in October 2011 to 0.50% in November. It then

fell to 0.38% in December, and has stayed at this level

since. (Chart 1.33) Meanwhile, the three-month US$

SIBOR rose from 0.43% in October 2011 to 0.58% in

December, as concerns over the Eurozone debt crisis

and its potential spillover on global financial institutions

led to a shortage of US$ liquidity and thus a rise in the

cost of borrowing US$. As risk aversion has diminished

since the turn of the year, the US$ SIBOR

correspondingly eased to 0.47% by end-March.

Since mid-2011, the domestic interest rate has reverted

to being at a discount to the US$ SIBOR, following an

anomalous two-year period when it was higher than

the US$ rate. The differential between the two rates

has however narrowed in the first three months of this

year.

Likewise, the three-month S$ swap offered rate (SOR),

which represents the cost of borrowing S$ via a

swap out of US$, rose to 0.55% in December 2011.

This reflected the higher US$ funding cost. The SOR

then edged down to 0.39% in January 2012, in tandem

with the moderation in the US$ SIBOR, and eased

further to 0.36% as at end-March. Typically, the SOR

tracks the interbank rate closely, but tends to be more

responsive to liquidity conditions as swap markets are

deeper than deposit markets.

Chart 1.31

S$NEER, S$REER and Relative CPI


Chart 1.32

Domestic Liquidity Indicator


Chart 1.33

Interest and Swap Rates

1985 1992 1999 2006

60

80

100

120

140

160

80

Ind

ex

(Q

1 1

98

5=

10

0)

S$REER*

S$NEER

Relative CPI*

Appreciation

Depreciation

2011 Q4

Oct Jan Apr Jul Oct Jan

-1.5

-1.0

-0.5

0.0

0.5

1.0

Ch

an

ge

fro

m P

rev

iou

s Q

ua

rte

r Tightening

Easing

Mar

2011

Exchange Rate Changes

InterestRate Changes

DLI*

2010 2012

2007 2008 2009 2010 2011 2012

End of Month

0

1

2

3

4

5

6

% P

er

An

nu

m

3-month S$ Swap Offered Rate

3-month Domestic

Interbank Rate

Mar

3-month US$ SIBOR



Credit growth moderated late last year amid the

slowdown in economic activity.

In line with the slower pace of economic activity,

domestic credit growth has moderated on a sequential

basis since Q4 2011. Between October 2011 and March

2012, domestic credit to the private sector grew by an

average of 1.2% m-o-m, down from 1.5% in the first

nine months of 2011. This reflected the slowdown in

business loan growth from 3.5% m-o-m to an average

of 1.1%. In comparison, consumer loan growth eased

modestly over the same period, as growth in housing

and bridging loans was resilient. (Chart 1.34)

M1 growth slowed

while growth in broad money was stable.

The economic slowdown in Q4 2011 reduced

the transactional demand for money and

money-equivalents. Growth in M1 thus eased to an

average of 14% y-o-y between October last year and

March this year, from 20% in the first nine months of

2011, largely due to a sharp slowdown in demand

deposit growth. (Charts 1.35 and 1.36) Meanwhile,

growth in the broader monetary aggregates, M2 and

M3, declined as well, albeit by smaller magnitudes.

Despite record low interest rates, growth in fixed and

savings deposits picked up over the same period,

reflecting in part increased demand for low-risk

S$ assets.

Chart 1.34

Domestic Credit to Private Sector

Chart 1.35

Money Aggregates

Chart 1.36

Components of Money Supply

2010 Jul 2011 Jul 2012Mar

-1

0

1

2

3

4

5

MO

M %

Gro

wth

Business Loans

Domestic Creditto Private Sector

Consumer Loans

2009 2010 2011 2012Mar

4

8

12

16

20

24

28

YO

Y %

Gro

wth

M1

M2

M3

2010 Jul 2011 Jul 2012Mar

-5

0

5

10

15

20

25

30

YO

Y %

Gro

wth

Currency in Active Circulaton

Demand Deposits

Fixed Deposits

Savings and

Other Deposits



Fiscal Policy9

Operating revenue rose on the back of

sustained economic growth last year.

Operating revenue rose by $6.4 billion to

$51.0 billion (15.6% of GDP) in 2011, as steady

economic growth raised incomes and consumption.

(Chart 1.37) The largest increases came from income

tax, GST and assets taxes (including property tax),

which together accounted for 80% of the total rise in

operating revenue.

Income tax, which is the largest component

of operating revenue, surged by $2.7 billion to

$21.0 billion in 2011. The bulk of the increase was

accounted for by the corporate sector, notwithstanding

the 20% corporate income tax rebate in Year of

Assessment 2011. Individual taxpayers also paid more

taxes (personal and withholding income taxes) last year

compared to 2010. Meanwhile, GST collections rose to

$8.9 billion last year, boosted by strong consumption

growth and higher tourist receipts.

Revenue from property tax and stamp duty rose by

$1.4 billion to $7.1 billion in 2011. Property tax

collected jumped by 47% to $3.8 billion as a result of

the upward revision in valuations as well as an increase

in the number of properties. Meanwhile, revenue from

stamp duty rose by only 5% in 2011 as sales

transactions slowed and property price increases

moderated, especially towards the latter part of the

year, due to the cumulative impact of the five rounds of

cooling measures introduced by the government

between September 2009 and December 2011.

The $3.3 billion collected in stamp duties was below

the peak of $4.1 billion recorded in 2007. (Chart 1.38)

Revenue from COE premiums—captured under fees

and charges—continued to rise, as the fall in new car

registrations in 2011 due to reductions in the COE

quota was offset by the increase in premiums.

(Chart 1.39)

Chart 1.37

Components of Operating Revenue

Chart 1.38

Private Residential Property Transactions

and Property-related Tax Collections

Chart 1.39

COE Premiums and New Car Registrations

9 This section is reported in calendar year rather than fiscal year.

Income Taxes

GST

Fees & Charges

Assets Taxes

Stamp Duties

Betting Taxes

Motor Vehicle Taxes

0 5 10 15 20 25

$ Billion

2010 2011

Customs & Excise Duties

1996 1999 2002 2005 2008 2011

-100

0

100

200

300

0

YO

Y %

Gro

wth

Revenue from Stamp Duty

Private Residential Property Transactions

Property Tax

2007 2008 2009 2010 2011 2012

0

3

6

9

12

Th

ou

sa

nd

0

20

40

60

80

$ T

ho

us

an

d

Average COE Premiums for

Cars (RHS)

New Car Registrations

(LHS)

Mar



The increase in government expenditure

was driven by operating expenses.

Total government expenditure rose by $2.7 billion

in 2011 to $46.8 billion (14.3% of GDP), largely

because of an increase in operating expenditure.

(Chart 1.40) Operating expenditure, which accounts for

about three-quarters of total government expenditure,

includes expenses on manpower, equipment and

supplies, as well as operating grants to statutory

boards and aided educational institutions to

support their day-to-day operations. Development

expenditure comprises longer-term investment in

capitalisable assets, such as roads and buildings.

Operating expenses amounted to $35.0 billion

(10.7% of GDP) in 2011, $2.3 billion more than in 2010,

largely because of increased social spending on

education ($1.4 billion). (Chart 1.41) Specifically,

the Ministry of Education dedicated more transfers to

educational institutions, giving substantial seed grant

endowments to the Singapore University of Technology

and Design, the Yale-NUS College and the Lee Kong

Chian School of Medicine. The Ministry of Health also

disbursed additional funding to the restructured

hospitals and intermediate and long-term care sector,

and increased spending on manpower training.

In addition, the Ministry of National Development

(MND) recorded higher expenditures for the Public

Housing Development Programme.

Development expenditure rose by $0.5 billion to

$11.8 billion (3.6% of GDP) in 2011. MND accounted

for about half the increase, as the Ministry incurred

larger expenses on additional lift upgrading

programmes as well as the Selective En bloc

Redevelopment Scheme. (Chart 1.42)

Chart 1.40

Government Expenditure

Chart 1.41

Selected Components of

Operating Expenditure

Chart 1.42

Selected Components of

Development Expenditure

2010 2011

0

10

20

30

40

$ B

illi

on

Operating Expenditure Development Expenditure

Education

Health

0 5 10 15

$ Billion

2010 2011

Security & External Relations

Community Development

GovernmentAdministration

National Development

Transport

Trade & Industry

Education

Health

0 1 2 3 4 5

$ Billion

2010 2011

Security & External Relations

Environment & Water Resources

NationalDevelopment



The fiscal policy stance was contractionary in 2011.

With operating revenue exceeding total expenditure,

the government recorded a primary surplus of

$4.2 billion in 2011, compared to $0.5 billion in 2010.10

Including special transfers but excluding the top-ups to

endowment and trust funds, the basic balance still

registered a surplus of $1.5 billion given the strong

outturn in operating revenues. (Chart 1.43)

This marked a turnaround from the deficit of $2.4

billion in 2010.

The FI measure provides a useful indication of the

initial stimulus to aggregate demand arising from fiscal

policy. In CY2011, the fiscal stance was contractionary,

as shown by the negative FI at −1.4% of GDP.

(Chart 1.44) It was also slightly more contractionary

than the earlier estimate (−0.2%) based on Budget 2011

figures, given the higher revenue received for the year.

Chart 1.43

Basic Surplus/Deficit

Chart 1.44

Fiscal Impulse Measure


10

The primary surplus/deficit is defined as operating revenue less the sum of operating and development expenditures.

2000 2003 2006 2009

-10

-5

0

5

10

$ B

illi

on

2011

1990 1995 2000 2005 2011

-4

-2

0

2

4

% o

f G

DP

-4

-2

0

2

4

% o

f P

ote

nti

al

GD

P

OutputGap (RHS)

Fiscal Impulse Measure (LHS)

Chapter 2 Wage-Price Dynamics



2.1 Labour Market Conditions

The Labour Market Remained Tight

Job creation strengthened in the second half of 2011

due to strong hiring in the construction sector and

seasonal gains in services employment. However,

hiring weakened and retrenchments rose in the

external-oriented sectors. On the whole, employment

growth was strong for the year. Resident wage growth

eased in H2 2011, but stayed above its historical

average.

Overall job creation was strong in H2 2011,

but uneven across the sectors.

Net employment gains rose from 53,100 in H1 2011 to

69,500 in H2, bringing total job creation to 122,600

in 2011. (Chart 2.1) This was slightly higher than the

115,900 registered in 2010.

The gains in H2 2011 were partly on account of

stronger hiring in the construction sector, given the

ramp up in residential construction and non-residential

private construction of buildings, such as shopping

malls.

The services sector also stepped up hiring in Q4 2011 to

meet the seasonal increase in demand in the

hospitality-related and retail trade sectors. (Chart 2.2)

At the same time, new education facilities, such as

the Yale-NUS College, Singapore University of

Technology & Design and Singapore Institute of

Technology, as well as capacity expansions in existing

hospitals, supported job creation in the community,

social & personal services (CSP) sector. These job gains

more than offset the slower employment growth in the

trade-related transportation & storage sector and

sentiment-sensitive financial & insurance sector in the

second half of 2011. The employment slowdown in

these sectors, in turn, led to more moderate hiring by

ancillary service providers in business services and

information & communications.

In contrast, the manufacturing sector shed jobs in

Q4 2011, its only quarterly loss for the year.

(Chart 2.1) Job cuts were widespread across the sector.

The machinery & equipment segment, a key source of

job creation in manufacturing in the earlier part of

2011, also hired at a significantly slower pace in Q4.

Chart 2.1

Employment Changes by Sector

Chart 2.2

Employment Changes in the Services Sector

Note: Business Services comprise Real Estate,

Professional, and Administrative & Support Services.

2009 Q3 2010 Q3 2011

-40

-20

0

20

40

Th

ou

san

d

Q4

ServicesManufacturing

Construction Overall

Wholesale & Retail

Accomm & Food Services

Business Services

Financial & Insurance

Transportation & Storage

Information & Comm

-5 0 5 10 15

Thousand

H1 2011 H2 2011

Community, Social & Personal Services

Wage-Price Dynamics 25


Retrenchments in the external-oriented sectors

picked up in Q4.

Weak business sentiment in the trade-related sectors

led to an increase in retrenchments in Q4 2011,

with around half of the 2,900 retrenchments taking

place in the manufacturing sector, especially

electronics. (Chart 2.3) At the same time, the number

of workers placed on shorter work-weeks or

temporarily laid-off in manufacturing rose sharply from

160 in Q3 2011 to 1,900 in Q4. Business services,

financial & insurance services, as well as wholesale &

retail trade, also saw higher retrenchments in Q4—

accounting for over one-third of total retrenchments.

Nonetheless, the labour market remained close

to full employment.

Overall, labour market conditions remained tight.

Indeed, the resident labour force is almost at full

employment, with the seasonally-adjusted resident

unemployment rate edging down slightly from 3.0%

in Q2 2011 to 2.9% in Q3 and Q4. (Chart 2.4)

The tightness in the labour market was also reflected in

the elevated ratio of job vacancies to unemployed

persons, although the ratio has fallen from its peak in

Q1 2011. There were approximately 1.2 jobs available

for every unemployed worker in H2 2011, which was

considerably higher than the average of 0.7 since 2000.

In addition, with the resident labour force participation

rate close to an all-time high, a substantial number of

foreigners were needed to support the construction

and services sectors. (Chart 2.5) Foreigners accounted

for over two-thirds of total employment gains in 2011.

Chart 2.3

Retrenched Workers and Workers on Short

Work-week or Temporary Lay-off

Chart 2.4

Resident Unemployment Rate and Ratio of

Job Vacancies to Unemployed Persons

Chart 2.5

Local and Foreign

Employment Changes by Sector in 2011

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Th

ou

sa

nd

Workers on Short Work-week or Temporary Lay-off

Retrenched Workers

2008 2009 2010 2011

0

1

2

3

4

5P

er

Ce

nt,

SA

0.0

0.3

0.6

0.9

1.2

1.5

Ra

tio

, S

A

Ratio of Job Vacancies to Unemployed Persons (RHS)

Resident UnemploymentRate (LHS)

Q4

Manufacturing Construction Services

-20

0

20

40

60

Th

ou

san

d

Local Foreign



Slower wage growth helped to moderate

the rise in unit labour costs.

Although resident wage growth eased, it was high at

4.0% y-o-y in Q4 compared to 3.3% average in the last

decade. (Chart 2.6) Meanwhile, labour productivity

growth slowed in H2 2011, but stayed positive. For the

year as a whole, labour productivity rose by 1.0%

compared to the average decline of 5.5% in previous

downturns, largely because of the relatively mild

output contraction this time round. Further, underlying

manufacturing productivity appears to have picked up

since its recovery from the Global Financial Crisis.

(Chart 2.7) With slower wage growth and continued

labour productivity increases, unit labour costs edged

up at a more moderate pace in the second half of 2011.

Chart 2.6

Nominal Wage, Productivity and

Unit Labour Costs

Chart 2.7

Labour Productivity by Sector


2009 Q3 2010 Q3 2011

-20

-10

0

10

20

YO

Y %

Gro

wth

-20

-10

0

10

20

YO

Y %

Gro

wth

, In

vert

ed

Q4

Nominal Wage (LHS)

Productivity (RHS)

Unit Labour Costs (LHS)

2005 2006 2007 2008 2009 2010 2011

60

80

100

120

140

160

Ind

ex

(Q

1 2

00

5=

10

0),

SA

Q4

Construction

Services

Manufacturing

Manufacturing ex-Pharma



2.2 Consumer Price Developments

Consumer Price Inflation was Persistent

The pass-through of cost increases picked up

amid resilient domestic demand …

Given the lacklustre performance of the trade-related

sectors and the narrowing of the output gap, wage cost

pressures started to subside in recent quarters.

This helped to mitigate the impact of the cyclical

slowdown in labour productivity growth on unit labour

cost increases, which eased from 5.2% y-o-y in H1 2011

to 1.7% in H2. (Chart 2.8) The year-ago increase in the

Unit Services Cost Index (USCI), EPG’s measure of cost

conditions in the services industry, also fell to 2.6% in

the final quarter of 2011, down from 7.4% in Q1.

Despite easing cost pressures, firms continued to pass

on the cost increases of the past two years to

consumers, given resilient domestic demand

conditions. Retail sales, in particular, held up well

despite the slowdown in GDP growth. (Chart 2.9)

… while imported inflation came in slightly stronger

than anticipated.

On the external front, core inflation in the advanced

economies was subdued as a result of significant slack

in factor markets. Inflation in the emerging economies

also subsided, as the effects of earlier weather-induced

supply disruptions dissipated and export growth

moderated. Meanwhile, global commodity prices,

in US$, corrected downwards in H2 2011 on the back of

rising macroeconomic uncertainties.

However, the impact was offset by the temporary

weakness in the S$ in Q4 2011. (Chart 2.10)

In addition, towards the end of 2011 and into this

year, global oil prices started to increase.

Consequently, the overall import price index (IPI) rose

by 3.0% sequentially in Q4 2011 and by another 0.9% in

Jan–Feb 2012, after falling by 1.5% in Q3 2011.

Chart 2.8

Growth in ULC and USCI

Chart 2.9

Growth in Retail Sales & Real GDP

* Refers to Advance Estimates for real GDP and

Jan–Feb data for Retail Sales Index.

Chart 2.10

Contribution to Global Commodity Price

Increases in S$

Note: The estimates are derived from changes in the

energy and the non-fuel sub-indices of the IMF

Primary Commodity Price Index, in US$, converted

using the S$-US$ bilateral exchange rate.

2007 2008 2009 2010 2011

-15

-10

-5

0

5

10

15

% Y

OY

USCI

ULC

Q4

2007 2008 2009 2010 2011 2012

-10

-5

0

5

10

15

20

% Y

OY

Real GDP Retail Sales Index, excluding MotorVehicles at 2010 Prices

Q1*

2010 Q3 2011 Q3 2012

-10

-5

0

5

10

15

to Q

OQ

Gro

wth

% P

oin

t C

on

trib

uti

on

Energy

Non-fuels

Exchange Rate Effect

Commodity Inflation, S$ Terms

Q1



Sequential increases in CPI-All Items

and MAS Core Inflation were strong.

The proportion of the MAS Core Inflation basket that

saw sequential price increases remained fairly high.1

(Chart 2.11) In part reflecting this, MAS Core Inflation

and CPI-All Items inflation was also strong in Q1 2012,

at 1.0% q-o-q and 1.2% respectively.

On a year-ago basis, CPI-All Items inflation was more

persistent than previously anticipated. It was 5.5%

in Q3 and Q4 2011, and only moderated to 4.9%

in Q1 2012 owing to base effects associated with high

car prices in the same period last year.

(Charts 2.12 and 2.13) Meanwhile, MAS Core Inflation

rose from 2.4% in Q4 2011 to 3.1% in Q1 2012. Of the

0.7% point increase, around 0.5% point was due to the

removal of radio & TV licence fees a year ago.

There were fee increases across several consumer

services in recent months.

The robust economic recovery in 2010, subsequent

expansion into early 2011, and consequent tightening

of the labour market, pushed up firms’ operating

expenses. However, a series of shocks also buffeted

the global economy last year.

Due in part to these global uncertainties, domestic cost

increases did not filter through significantly to

consumer services fees for the most part of 2011.

(Chart 2.14) This is even after accounting for the

removal of radio & TV licence fees from January 2011,

without which services inflation would have been

1.0% point higher. However, with the dissipation of

downside risks and strong domestic consumption,

the pass-through of accumulated wage costs to

consumer prices strengthened recently, leading to a

spate of services fee adjustments. (Chart 2.15)

Chart 2.11

Proportion of Items with Sequential Price

Increases in the MAS Core Inflation Basket

Chart 2.12

CPI-All Items Inflation and

MAS Core Inflation

Chart 2.13

Contribution to CPI-All Items Inflation

1 Despite the dip in the most recent quarter, the proportion averaged 80% in Q4 2011 and Q1 2012, compared to 75% in

the two preceding quarters and 68% over the past five years.

2007 2008 2009 2010 2011 2012

40

60

80

100

Per

Cen

t

Q1

2007 2008 2009 2010 2011 2012

-2

0

2

4

6

8%

YO

Y

MAS Core Inflation

CPI-All Items Inflation

Q1

2010 2011H1 H2 2012Q1

0

2

4

6

to Y

OY

Gro

wth

% P

oin

t C

on

trib

uti

on

Accommodation

Services

Food

Oil-related

Pte Rd Trpt ex-Petrol

Others



In particular, the seasonal rise in holiday travel costs

began earlier than usual in November last year.

Taxi operators also raised fares from end-2011, the first

revision in more than three years. Upward fee

adjustments by educational institutions, such as

kindergartens and childcare centres, as well as medical

establishments have also been widespread since

Q4 2011.

As a result, the sequential increase in services costs

more than doubled from 0.4% in Q3 2011 to 1.0% in

Q1 2012. (Chart 2.15) On a year-ago basis, services

cost inflation stepped up from 1.4% in Q3 2011 to 3.2%

in Q1 2012.

Higher import prices contributed to an increase

in retail prices of food …

The UN FAO Food Price Index, a proxy for global food

prices, edged down throughout most of 2011 and is

currently 9.3% lower than the peak in February 2011.

(Chart 2.16) This was due to normalising weather

conditions and increased crop production in response

to earlier high prices, along with moderating global

demand.

However, Singapore’s food import prices continued to

increase throughout most of 2011 and only corrected

from November onwards. Up till Q3 2011, food import

prices could still be responding to the sharp increase in

global food commodity prices in 2010, as food

importers typically enter into long-term contractual

agreements with their suppliers. In September and

October 2011, food import prices were also pushed up

by the weaker S$.

As a result of earlier increases in food import prices,

higher business costs and strong seasonal demand

during the Chinese New Year, sequential retail food

price increases picked up slightly from 0.6% q-o-q in

Q3 2011 to 0.8% in Q1 2012.

… and oil-related items.

Similarly, geopolitical events in Iran and a series of

other supply disruptions pushed up global oil prices and

hence, imported oil prices in Q4 2011 and in early

2012.2 In particular, the WTI benchmark price surged

Chart 2.14

Growth in USCI and CPI Services


Chart 2.15

Incidence and Magnitude of Sequential

Services Fee Increases in the CPI

Chart 2.16

FAO, IPI and CPI Food Price Indices

Source: FAO

2 Disruptions arose from the production shutdown in South Sudan, the labour strikes in Yemen and international sanctions

on Syria’s exports. As a result, over one million barrels per day are estimated to have been removed from the oil market,

amounting to more than one-third of OPEC’s surplus production capacity.

2006-10 Average 2011

0

1

2

3

4

5

6

% Y

OY

USCI CPI Services

2007 2008 2009 2010 2011 2012

20

40

60

80

100P

er

Cen

t

-1

0

1

2

3

% Q

OQ

Proportion of Services with Sequential Price Increases

(LHS)

Sequential Services Fee

Increases (RHS)

Q1

2007 2008 2009 2010 2011 2012

90

100

110

120

130

140

150

Ind

ex (

Jan

2007=

100)

UN FAO Food

CPI Food

IPI Food

Mar



to US$106 per barrel in March this year, only slightly

lower than the levels following the outbreak of the civil

war in Libya in Q1 2011. (Chart 2.17)

As a result, electricity tariffs rose in January while

petrol pump prices were adjusted upwards on

four occasions in Q1 2012. On a year-ago basis,

the contribution of oil-related items to CPI-All Items

inflation was around 0.6% point in Q1 2012, similar to

that in Q3 2011.

COE premiums were lower in late 2011

amid subdued bidding activity.

Biddings for COEs, which are indicative of the

strength of demand, were generally sluggish

from H2 2011 to early 2012. (Chart 2.18) As such,

car COE premiums fell in December 2011 and

January 2012 by a cumulative 14% before surging again

in February. The earlier declines, together with a

much higher base a year ago, resulted in private

road transport cost (excluding petrol) adding

0.6% point y-o-y to CPI-All Items inflation in Q1 2012,

down from 1.5% point in H2 2011.

Accommodation cost continued to rise

as leasing contracts were reset to higher rentals.

Weaker demand for both private and HDB rental

properties led overall leasing activity to fall slightly in

H2 2011, before stabilising in recent months. In the

private residential segment, with the number of

completed units also increasing, vacancy rates rose

marginally to above the recent five-year average.

(Chart 2.19) Correspondingly, rental values for new

contracts in the private residential segment broadly

stabilised. In contrast, the HDB segment continued to

see some supply-side constraints which supported

further increases in new HDB leasing contract values.

Nevertheless, rentals for newly-contracted leases in

both the private residential and HDB segments were

still much higher than those on existing leases.

The “resetting” of existing contracts to prevailing

market rates thus led to a significant rise in CPI

accommodation cost. On a y-o-y basis, accommodation

cost jumped by 11% in H2 2011 and 10% in Q1 2012

and accounted for 2.0% points, or more than 40%

of CPI-All Items inflation in Q1 2012.

Chart 2.17

WTI Oil Price and CPI Oil-related Items

Chart 2.18

Number of Bids Received &

Car COE Premiums

Chart 2.19

Private Residential Property Vacancy Rate &

Rental Index

2007 2008 2009 2010 2011 2012

50

100

150

200

250

Ind

ex (

Jan

2007=

100)

80

100

120

140

160

Ind

ex (

Jan

2007=

100)

WTI Oil Price (LHS)

CPI Oil-related Items (RHS)

Mar

2010 Jul 2011 Jul 2012

2

3

4

5

6

7T

ho

usan

d

20

30

40

50

60

70

$ T

ho

usan

d

Feb

Number of Bids (LHS)

Car COE Premiums (RHS)

2006 2007 2008 2009 2010 2011 2012

0

2

4

6

8

Per

Cen

t

100

120

140

160

180

Ind

ex (

Q1 2

006=

100)

Vacancy Rate(LHS)

2006-10 Average(Vacancy Rate)

Q1

Private Residential Property Rental Index (RHS)



It is important to note that in the CPI-All Items series,

residential property rentals are used as a proxy for the

costs that households incur in consuming housing

services. Given that homeowners do not actually pay

rent, this amount is therefore purely notional. As such,

DOS also reports the “CPI excluding imputed rentals on

owner-occupied accommodation” (CPI-ex OOA) series

to capture the impact of price changes on households’

cash expenditure. While imputed rentals are not

captured in the CPI-ex OOA series, actual rentals

incurred by households leasing residential properties

are included in this series.3

The y-o-y increase in CPI-ex OOA eased from 4.3% in

Q4 2011 to 3.6% in Q1 2012, reflecting the lower

contribution from car prices. Notably, the increase in

CPI-ex OOA was more than 1.0% point lower than that

of CPI-All Items inflation for the fourth consecutive

quarter. This was due to the significant weight (15.6%)

of OOA in the CPI-All Items series, which is reflective of

the high home ownership rate in Singapore, and the

sharp rise in market rentals over the past few quarters.

3 Another measurement issue that frequently arises concerns the treatment of mortgage repayments in the CPI. The CPI

measures the costs of consumption goods and services, rather than investments. As rentals clearly capture consumption

costs, they are conceptually compatible with the CPI. However, mortgage repayments, incurred by households residing in

their own properties, are associated with the cost of asset acquisition which includes an investment element. Thus,

mortgage repayments are not reflected in the Singapore CPI, similar to the practice in most other countries.

Chapter 3 Outlook



3.1 External Outlook

An Extended Period of Subdued Growth

The global economy is expected to resume a steady,

though sub-par, growth path in 2012.

The near-term prospects for the world economy have

improved in recent months after a stream of positive

developments in the major economies helped to

bolster confidence and ward off the risk of a serious

financial disruption. In the Eurozone, decisive

intervention by the European Central Bank (ECB)

resulted in a reprieve from the sovereign debt crisis.

Meanwhile, US economic data raised confidence of

a more assured, albeit modest, recovery in 2012.

In China, where a moderation in growth is underway,

the decline in headline inflation has afforded the

authorities room to ease policies and support growth.

Although tail risks have diminished, the advanced

economies continue to face structural headwinds

from private and public sector deleveraging. The G3

economies are therefore expected to attain only

sub-par growth this year. (Table 3.1) Indeed, the slow

recovery from the financial crisis may have lowered

trend growth rates in the US and Eurozone. Current

and future fiscal consolidation, by reducing public

investment in physical and human capital, could

restrain potential output in the medium term.

The performance of the Asian economies will depend in

part on the strength of the upturn in the US and the

global electronics cycle. Growth in Asia ex-Japan will

also be held up by domestic demand, which has stayed

resilient throughout the global downturn last year.

Beyond the short run, however, the process of

rebalancing the sources of growth in the region

towards private consumption and investment will

require time and new policy initiatives. In the interim,

Asia might experience a slight demand shortfall

as reduced exports to the advanced economies cannot

be fully replaced by indigenous spending.

Table 3.1

GDP Growth Forecasts (%)

2011 2012F 2013F

Total* 4.3 4.1 4.8

G3* 1.1 1.2 1.7

US 1.7 2.3 2.5

Eurozone 1.5 −0.4 0.9

Japan −0.7 2.0 1.5

Asia ex-Japan* 5.8 5.5 6.1

NIE-3* 4.4 3.1 4.4

Hong Kong 5.0 3.0 4.6

Korea 3.6 3.3 3.9

Taiwan 4.0 3.1 4.5

ASEAN-4* 4.5 5.0 5.4

Indonesia 6.5 6.0 6.4

Malaysia 5.1 4.3 5.1

Thailand 0.1 5.3 4.7

Philippines 3.7 4.0 4.9

China 9.2 8.4 8.5

India** 7.1 7.2 7.7

Source: CEIC and Consensus Economics Inc.

* Weighted by share in Singapore’s NODX.

** Forecast refers to fiscal year ending March.

Outlook 35


The US economy is likely to grow moderately.

In the first quarter of 2012, US industrial production

expanded by 1.3% q-o-q SA, accompanied by an

increase in retail sales, especially of automobiles.

Thus far, leading indicators such as the economy-wide

PMIs point to a further recovery, while consumer

confidence indices are markedly above the levels seen

last September. (Chart 3.1)

Nonetheless, real household incomes have fallen by an

average of 0.2% m-o-m SA in January and February,

crimped by higher energy prices. Real incomes should

start to grow again if oil price increases are contained

and the labour market continues to improve—

non-farm employment increased by 635,000 in Q1

2012 compared to 492,000 in Q4 2011. The moribund

housing market has also shown nascent signs of

recovery, with a recent drop in the number of vacant

housing units. (Chart 3.2) New household formation

trebled last year, suggesting that the demand for

houses could soon catch up with supply, aided by

record low mortgage rates and improved affordability.

A mild recession is projected for the Eurozone.

In the Eurozone, the ECB’s provision of over €1 trillion

in liquidity through two longer-term refinancing

operations (LTRO) in December 2011 and February

2012 has relieved short-term funding stresses,

but these measures have yet to translate into an

increase in bank lending to the private sector.

(Chart 3.3) The need for fiscal consolidation in order to

achieve targets set out in the EU fiscal compact will also

constrain growth this year. This, coupled with high

unemployment and depressed consumer sentiment,

will likely tip the Eurozone into a mild recession in

2012.

Moreover, fundamental problems continue to weigh on

confidence and could pose further downside risks to

the short-term economic outlook for the Eurozone.

As a result of fiscal austerity measures, there are fears

that nominal output growth may be too weak to

facilitate a reduction in the debt-to-GDP ratios of the

peripheral economies. Greece and Spain, in particular,

could fall into a downward cycle of shrinking tax

revenues and declining activity, forcing them deeper

into debt and re-igniting market jitters of unsustainable

fiscal trajectories. This in turn could cause the banking

sector to deleverage further, given its large holdings of

sovereign debt.

Chart 3.1

US Purchasing Managers’ Indices

Source: ISM

Chart 3.2

US Housing Vacancies and Mortgage Rates

Source: CEIC

Chart 3.3

Bank Lending to the Eurozone Private Sector

Source: ECB

Note: Private sector comprises households and non-

financial corporations.

2008 2009 2010 2011 2012

30

35

40

45

50

55

60

65

Ne

t B

ala

nc

e,

>5

0=

Ex

pa

ns

ion

Manufacturing

Mar

Services

2007 2008 2009 2010 2011 2012

16

17

18

19

20

Mil

lio

n

3

4

5

6

7

Pe

r C

en

t

Q1

Housing Vacancy (LHS)

15-year Fixed Rate Mortgage (RHS)

10-year Average Rate (RHS)

2009 Jul 2010 Jul 2011 Jul 2012

-5

0

5

10

YO

Y %

Gro

wth

Feb

Non-financial Corporations

Households

Private Sector



Reconstruction will boost Japan’s growth,

but energy constraints loom.

As the effects of the supply disruptions from the Thai

floods faded, Japan’s post-tsunami economic recovery

resumed in early 2012. Growth this year will be

boosted by increased public investment for

reconstruction purposes, as well as private

consumption which should receive a fillip from the

restarting of the ‘green car’ purchase programme.1

Nonetheless, the recovery is fragile and could easily be

derailed by a slump in external demand or a

resumption in yen appreciation. (Chart 3.4) Japan’s

economy is also highly vulnerable to an increase in

global oil prices at this juncture, given the severe

energy supply constraints it faces due to the shutdown

of its nuclear power plants.

The Northeast Asian economies could pick up

later in the year if external demand improves.

In view of the subdued performance of the advanced

economies, growth in Asia ex-Japan is expected to

moderate further in 2012. Real GDP growth in regional

heavyweight China is likely to soften to 8.4% this year,

from 9.2% in 2011. In Q1 2012, the Chinese economy

expanded by 8.1% y-o-y, the slowest in almost three

years, as earlier rounds of monetary tightening and

property market curbs exacerbated the effects of

sluggish external demand.

Nevertheless, China’s economy should gradually pick

up pace over the rest of the year. Cautious monetary

easing is expected to support loan growth while

targeted fiscal spending on infrastructure works and

social housing construction will cushion the fall in real

estate investment. In addition, the tight labour

market—as indicated by the higher ratio of vacancies

to job-seekers—should boost wages and stimulate

private consumption, helped along by longer-term

measures such as income tax reforms. (Chart 3.5)

Despite the slowdown in China, the export sectors

in Korea and Taiwan appear to be lifting as US

demand recovers and the electronics cycle turns.

The manufacturing PMIs in these economies have risen

since late 2011 and have crossed over into expansionary

territory since February 2012, indicating a rebound in

industrial activity in the next few months. (Chart 3.6)

Chart 3.4

Japan’s Exchange Rate and Exports

Source: CEIC

Note: A positive change in the exchange rate denotes

yen appreciation.

Chart 3.5

China’s Ratio of Vacancies to Job-seekers

Source: CEIC

Note: A ratio above one suggests excess demand for

labour.

Chart 3.6

Purchasing Managers’ Indices

in Korea and Taiwan

Source: Markit

1 This programme of subsidies for fuel-efficient automobiles was first initiated by the Japanese government in April 2009.

It expired in September 2010 and was re-introduced in December 2011.

2005 2006 2007 2008 2009 2010 2011 2012

-60

-40

-20

0

20

40

60

YO

Y %

Gro

wth

-30

-20

-10

0

10

20

30

-30

YO

Y %

Ch

an

ge

, U

S$

/Ye

n

Mar

Exports (LHS)

Yen (RHS)

2009 Q3 2010 Q3 2011 Q3 2012Q1

0.7

0.8

0.9

1.0

1.1R

ati

o

2011 Mar May Jul Sep Nov 2012 Mar

40

45

50

55

60

Ind

ex

, >

50

=E

xp

an

sio

n

Korea

Taiwan

Outlook 37


Domestic demand, particularly investment, will

underpin growth in the ASEAN-4.

In the ASEAN-4, domestic demand will continue to play

an important role in supporting growth during 2012.

Private consumption will be underpinned by rising

household incomes, owing to tight labour markets and

hikes in minimum wages and civil servants’ pay.

In Thailand, government flood relief measures will

provide a further boost to household spending.

The ASEAN-4 countries, particularly Indonesia,

are poised for an investment revival after a prolonged

period of weak capital spending. Aggregate investment

rates fell significantly during the Asian Financial Crisis,

and have generally remained low since. (Chart 3.7)

In recent years, however, ASEAN’s attractiveness as an

investment location has been enhanced as a result of

improving macroeconomic fundamentals and political

stability. Its appeal as an alternative manufacturing

base has also strengthened in the light of rising

production costs in China, and firms’ pursuit of greater

supply chain diversification following the Tohoku

disaster.

In addition, ASEAN governments have taken steps to

ease infrastructure bottlenecks, which will lift

productivity and raise economic capacity. Since the

late 1990s, the region’s investment efficiency has

improved, as shown by the decline in incremental

capital-output ratios (ICOR) to around 4, closer to the

NIEs’ average of about 2.5 during their industrialisation

phase.2 (Chart 3.8)

For 2012, ASEAN governments have already announced

a pipeline of infrastructure projects in their countries.

In Indonesia, the passing of the land acquisition bill in

December last year should help to facilitate the

implementation of infrastructure projects. Meanwhile,

its recent sovereign debt rating upgrade to investment

grade status is expected to attract larger capital

inflows, including foreign direct investment.

In Malaysia, private investment will be stimulated by

the ongoing implementation of projects under the

government’s Economic Transformation Programme

(ETP). In Thailand, where a V-shaped recovery is

underway after the severe flooding in Q4 2011,

reconstruction works and flood mitigation projects will

boost investment spending over the next two years.

Chart 3.7

ASEAN-4’s Investment Share in GDP

Source: CEIC and EPG, MAS Estimates

Chart 3.8

ICORs in ASEAN-4

Source: CEIC and EPG, MAS Estimates

* Thailand’s 2011 figure is omitted because of

distortions created by the impact of the severe

flooding in Q4.

2 ICOR measures the average increase in capital required to produce an additional unit of output. A decline in ICOR

indicates a rise in investment efficiency.

1995 1999 2003 2007 2011

10

20

30

40

50

60

Per

Cen

t

Indonesia

Malaysia

Philippines

Thailand

1986 1991 1996 2001 2006 2011

2

3

4

5

6

7

Ra

tio

Malaysia

Indonesia

Phlippines

Thailand*



There are upside risks to inflation, especially in Asia.

Elevated oil prices could pose upside risks to global

inflation in 2012 should geopolitical tension in the

Middle East escalate. Also, a stronger-than-anticipated

upturn in the global economy would exacerbate

inflationary pressures in 2012.

Headline inflation in the US may creep up with higher

energy costs and a sustained recovery in the labour

market. Meanwhile, overall inflation in the Eurozone is

only expected to decline gradually from a three-year

high of 2.9% y-o-y in Q4 2011 due to recent increases in

oil prices and higher indirect taxes in some countries.

However, core inflation should be muted as

deteriorating labour market conditions will dampen

wage pressures. In Japan, a closing output gap and

energy shortages should prevent prices from falling

significantly this year.

Across Asia ex-Japan, headline inflation is expected to

ease slightly in 2012 as a result of the high base in

2011, the recent stabilisation of food prices, and a

slight moderation in output growth. However, with

many economies currently operating close to potential

output, a resurgence in global economic growth could

cause underlying price pressures to intensify. Although

the presence of fuel subsidies or price controls in some

Asian countries will cushion the impact of a further

run-up in oil prices, such measures are difficult to

sustain indefinitely. Indeed, countries such as China

and Indonesia plan to liberalise domestic energy prices

and reduce subsidies.

Outlook 39


3.2 Outlook for the Singapore Economy

Gradual Emergence from the Slowdown

The Singapore economy is expected to expand

by 1–3% this year.

Between Q2 and Q4 last year, the domestic economy

consolidated somewhat as it was buffeted by external

shocks, including financial market turbulence and

natural disasters. While there was some tentative

improvement at the turn of the year, especially in the

US economy, the global economy remains vulnerable to

downside risks as deep structural issues persist in the

developed economies, particularly the Eurozone.

The slowdown in China, and elevated oil prices have

also added uncertainty to the near-term outlook.

These external developments continue to cap the

upside to domestic growth prospects. The ongoing

tightening of foreign worker policies could also impact

firms’ short-term profitability.

EPG’s assessment is that the Singapore economy

should see modest growth in the quarters ahead,

alongside gradual improvements in the external

environment. While the expansion in Q1 2012 was

relatively strong, much of the growth was driven by

the easing of transitory shocks from last year.

Trade-related activity is thus likely to remain sluggish,

particularly in electronics which has been hit by both

global and domestic factors. Growth will instead be

anchored by domestic and regional-oriented services,

such as the tourism and financial industries.

Thus, barring a major dislocation in the global

economy, Singapore’s GDP growth is expected to come

in at 1–3% this year.

The modest uplift in the external environment will

underpin the recovery in the global IT industry.

In Chapter 1, the expansion in Singapore’s Q1 2012

GDP was attributed to the strong turnaround in

IT-related activities. The recovery largely reflected the

normalisation of production activities following the

series of regional supply-related shocks in 2011.



The outlook for the global IT industry hinges critically

on whether final demand will pick up strongly over the

next few quarters.

In the current global IT cycle, the recovery thus far has

been slower and more modest compared to that in

2009—which saw a sharp correction in inventories and

global chip sales followed by a swift rebound.

(Chart 3.9) In contrast, record levels of midstream

inventories were accumulated in H1 2011, as firms

stocked up on chips amid fears of shortages in the

immediate aftermath of the Tohoku earthquake.

However, before the IT industry could recover

fully from the effects of the Japan earthquake,

the adjustment process was hampered by the massive

flooding in Thailand in the latter part of the year.

As a result, global chip inventories crept back up to a

high of 84.1 days of inventory (DOI) in Q4, well above

the historical average of 75.7, and global chip

shipments contracted for a second straight quarter,

falling by 8.1% q-o-q. (Chart 3.10) Industry estimates

point to a slight decline in stockpiles in Q1 this year,

edging down by 0.5% to 83.7 DOI. This is consistent

with the performance of key foundry companies which

recorded fairly subdued sales in the first quarter.

Encouragingly, downstream IT demand has started to

show some signs of picking up across both the

advanced economies and emerging markets. Some

support could come from the recovery in the US, where

corporate IT spending, which rose by 3.6% q-o-q SA in

Q4 following a 2.9% increase in Q3, should continue to

strengthen with the improvement in firms’ profits and

business sentiment. (Chart 3.11) Enterprise spending

growth will also be driven by rising demand for IT

networking products, alongside growing adoption of

new technologies such as cloud computing and desktop

virtualisation. In addition, US retail IT spending, which

contracted in December 2011, recorded positive gains

in Q1 2012. This could be reinforced by the launch of

devices such as the latest iPad, and a fresh series of

Ultrabook models in the second half of the year.

In China, while the pace of increase in corporate

spending has slowed, consumer spending on

electronics products recorded double-digit sequential

gains in the last two months of 2011, and should

continue to drive overall growth this year. This nascent

pickup in end demand should facilitate the ongoing

recovery in the global IT industry though it is still

dependent on a relatively sanguine macroeconomic

outcome in the key industrialised countries.

Chart 3.9

Global Semiconductor Inventories

Source: IHS iSuppli

Chart 3.10

Global Chip Shipments

Source: Company and Brokerage Reports

Chart 3.11

US and China Corporate IT Spending


Inventories (LHS)

2008 2009 2010 2011 2012Q1e

40

50

60

70

80

90

Da

ys

of

Inv

en

tory

-15

-10

-5

0

5

10

% Q

OQ

Global Financial

Crisis

Japan Quake

Thai Floods

Growth (RHS)

Q3

Q4

Q2

Q3

Q1

2008 2009 2010 2011 2012Q1e

1

2

3

4

5

6

Mil

lio

n

Japan Quake

Thai Floods

Global Financial

Crisis

Q2

Q3

Q4

Q1

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

-5

0

5

10

15

20

25

QO

Q S

A %

Gro

wth

China US

Outlook 41


Semiconductor manufacturing, which dominates

domestic electronics production,

could see a slower upturn.

The weakness in the global IT industry in 2011

appeared to have affected Singapore’s electronics

sector more than other key regional players, with

domestic electronics output falling by 29% from peak

to trough. (Chart 3.12)

This was partly due to Singapore’s relatively larger

exposure to midstream manufacturing. Chart 3.13

shows the proportion of IT exports of component parts

in final products amongst the regional players.

As at end-2010, Singapore’s exports of semiconductor

chips and hard disk-related parts took up a 93% share,

compared to 81% in Taiwan and 57% in Korea. Global

midstream sales were harder hit by the series of supply

shocks last year. (Chart 3.14) In comparison, demand

in the downstream segment proved more resilient, and

provided greater support to the Korean and Taiwanese

electronics industries in the current IT downturn.

While the divergence in the midstream and

downstream segments will narrow in the coming

quarters as the midstream excess inventories clear, it is

likely to be a gradual process, which will have a bearing

on Singapore’s electronics recovery in 2012.

In addition, the recovery in chip prices could vary,

depending on the strength of the end market that the

segment is tied to. In general, the domestic midstream

producers that are more focused on chips for

traditional PCs and handsets could face greater pricing

pressures given the slower growth of these segments.

Global markets for PCs and traditional handsets are

expected to record modest growth rates of 5–8% this

year, compared to the high double-digit expansions

projected for the tablet and smartphone markets.

(Table 3.2)

Chart 3.12

Regional Comparison of Electronics IIP

Source: CEIC

Chart 3.13

Midstream and Downstream IT Exports

in 2010

Source: Bureau of Foreign Trade, Taiwan, UN

Comtrade and EPG, MAS estimates

Chart 3.14

Global Demand for Electronics

Source: Semiconductor Industry Association,

Company Reports and EPG, MAS estimates

2010 Jul 2011 Jul

80

90

100

110

120

130

Ind

ex

(J

an

20

10

=1

00

), S

A

Singapore

Korea

Taiwan

Dec

0

20

40

60

80

100

% S

ha

reMidstream Downstream

TaiwanSingapore Korea Thailand Indonesia China

2007 2008 2009 2010 2011

50

75

100

125

150

175

200

Ind

ex

(Q

1 2

00

7=

10

0),

SA Downstream

Sales

Midstream Sales

Q4



The rest of the trade-related industries

could see some consolidation.

The rest of the domestic trade-related industries are

expected to turn in modest gains. In the chemicals

industry, for instance, growth is expected to be

restrained by capacity expansions from new crackers

in Asia and the Middle East. In a similar vein,

the domestic pharmaceutical industry will also see

more measured growth this year, on the back of the

ongoing consolidation in the global pharmaceutical

market. Together with electronics, these two clusters

make up more than 60% of overall manufacturing

production.

Mirroring the muted performance in Singapore’s

overall manufacturing sector, activity in trade-related

services will be capped. In the wholesale trade sector,

non-oil re-exports fell by 2.0% q-o-q SA in Q1 this year,

following a 6.1% rise in the preceding quarter,

as shipments to Northeast Asia slowed. Air cargo

volumes also showed renewed weakness in March,

declining by 5.4% m-o-m SA after some improvement in

the preceding few months.

Prospects for the domestic shipping industry are

subdued as well. According to shipping consultancy

firm Drewry, global container growth is set to come in

at 4.6% this year, down from 7.4% in 2011. This is in

line with the latest IMF estimates of a 4.0% rise in

world trade in 2012, following a 5.8% expansion last

year.

The shipping industry has been undergoing

restructuring since late last year, as severe

overcapacity, waning demand and high fuel prices

impacted profitability. In fact, the number of idle

container ships rose to an 18-month high as of early

December last year.3 While efforts have been made to

reduce capacity early this year, there will be significant

additions to the global fleet servicing the key

transpacific routes in the coming months, which will

exert renewed downward pressure on freight rates.

In addition, global demand remains uncertain at this

juncture and a downturn could lead to further

consolidation in the industry later this year.

Table 3.2

Electronics Forecast for 2012

Units

(Million)

YOY %

Growth

Tablets 160 71

Smartphones 660 40

PCs 380 5.1

Traditional Handsets 1,130 7.5

Source: Gartner, IDC, IHS iSuppli and Company

Reports

3 Based on weekly reports from shipping research firm, Alphaliner.

Outlook 43


The resilience of domestic and regional-oriented

activities will be a key support this year.

While prospects for the manufacturing-linked

industries are uncertain, the non trade-related service

sectors will remain buoyant and supportive of GDP

growth in 2012, on the back of strong regional and

domestic fundamentals.

The region has emerged as an important end market

for the services sectors, particularly tourism-related

and financial activities, underpinned by rising incomes.

The domestic tourism industry, in particular,

is well-positioned to benefit from growing intra-Asia

travel. According to the United Nations World Tourism

Organisation (UNWTO), tourist arrivals into Asia could

expand by 4–6% in 2012, faster than the 3–4% growth

in global tourist arrivals. UNWTO attributed the

relatively stronger inflows to Asia to intra-Asia arrivals.

Given firm travel demand in Asia as well as the addition

of new routes, air passenger traffic saw firm growth

last year. Passenger traffic at Changi Airport grew by

11%, driven by double-digit gains in the Southeast and

Northeast Asia segments. With flight additions to cities

within China and Southeast Asia, flight volumes,

especially those accounted for by low-cost carriers,

should continue to register strong growth this year.

The rising demand for intra-regional travel has led to a

shift in the composition of Singapore’s tourist arrivals in

the last decade. In fact, the share of arrivals into

Singapore from ASEAN and emerging economies such

as China and India, rose significantly to 60% in 2011,

from 47% in 2002. (Chart 3.15) Moreover, tourists

from these markets tend to have higher spending

power. As shown in Chart 3.16, the markets that have

seen both higher-than-average tourist spending and a

growing share of Singapore’s visitor arrivals have all

been from the region. In particular, Chinese tourists’

receipts have seen a sharp increase over the last

decade. (Chart 3.17) Although these have fallen

somewhat following the Global Financial Crisis, levels

remained at about twice that seen in the early 2000s.

Chart 3.15

Visitor Arrivals

Chart 3.16

Average Tourist Receipts and

Visitor Arrivals by Markets


Chart 3.17

Tourist Receipts Per Capita


2002 2005 2008 2011

0

5

10

15

Mil

lio

n

China and India Rest of the World

G3

NIE-3

ASEAN

-5 -4 -3 -2 -1 0 1 2 3 4 5

Visitor Arrivals (2002-11)

% Point Change in Share of Singapore's

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.1

in 2

01

1 (

$ T

ho

us

an

d)

Av

era

ge

Re

ce

ipts

Pe

r T

ou

ris

t

China

PhilippinesIndia

Malaysia

Japan

USA

Indonesia

Higher Spending,

Mature Markets

Higher Spending,

Growing Markets

Budget,

Mature Markets

Budget,

Growing Markets

AverageThailand

Australia

2002 2005 2008 2011

0.6

0.8

1.0

1.2

1.4

1.6

$ T

ho

us

an

d

China

Overall



New tourist attractions such as the Gardens by the Bay,

the largest horticultural recreational space in the

region, and the River Safari, a water-themed zoological

park, are also expected to come on-stream later in

2012. Together with the opening of new attractions at

the IRs such as the Marine Life Park, these additions to

the tourism infrastructure should attract more visitors

to Singapore. The opening of the International Cruise

Terminal at the Marina Bay in Q2, which will

accommodate cruise ships that were previously too

large to dock in Singapore, will double current berthing

capacity and support higher cruise passenger volumes.

Meanwhile, in the financial sector, growth in corporate

profitability has spurred firms in the region to seek

business expansion opportunities. A poll by Bank of

America-Merrill Lynch showed that nearly 34% of

regional CFOs surveyed intend to embark on M&A

activities in 2012.4 Firms in the region have also turned

increasingly to local financial institutions for financing

in the wake of a pullback in lending by capital-

constrained European banks. The need for credit has

contributed to strong gains in ACU non-bank lending,

with the region driving growth in Q1. (Chart 3.18)

Indeed, Chart 3.19 shows that the loan-to-deposit ratio

has been trending upwards since H2 2011.

The improvement in investment sentiment has also

generated spillovers to various capital market activities.

Regional firms raised more funds, contributing to the

surge in corporate debt issuance in Q1. In particular,

companies engaged in niche activities such as aviation

financing have been more active in recent months.

According to data from Bloomberg, S$ debt issuance for

aviation firms swelled to $495 million from $12.5 million

in the quarter before.

Chart 3.18

Contribution to ACU Non-bank Lending

Growth

Chart 3.19

ACU Non-bank Loans & Deposits

4 According to the 2012 CFO Outlook Asia by Bank of America-Merrill Lynch.

2011 Q2 Q3 Q4 2012Q1

-2

-1

0

1

2

3

4

% P

oin

t C

on

trib

uti

on

to

QO

Q G

row

th

East Asia Europe The Americas

2010 Q3 2011 Q3 2012Q1

200

250

300

350

US

$ B

illi

on

0.8

0.9

1.0

1.1

Ra

tio

Loans (LHS)

Deposits (LHS)

Loan-to-deposit Ratio(RHS)

Outlook 45


Domestic-based activities will be boosted

by wage growth and the uptick in construction.

On the domestic front, consumer sentiment is expected

to remain firm. Over the past decade, retail sales and

private consumption have broadly tracked resident

wage growth. (Chart 3.20) With local wages expected

to still increase at a healthy pace this year, retail sales

and other domestic-oriented services should continue

to record steady expansions.

Indeed, the recent spurt in domestic demand is likely to

have been supported by income gains rather than

short-term wealth effects induced by asset price

fluctuations. Box A examines the empirical relationship

between wealth and consumption in further detail and

provides evidence that both stock and property prices

are unlikely to be important factors for increased

consumer expenditure in the short term.

Meanwhile, the construction industry should continue

to expand in 2012, following a ramp-up in contracts

awarded over the past two years. Total construction

contracts awarded rose by 17% to $32 billion last year,

with gains largely in the residential and civil-

engineering segments. (Chart 3.21) The steady

pipeline of contracts awarded in 2011, which included

the HDB’s Build-to-Order programme of 25,000 units,

Jurong East Mall, and the MRT Downtown Line Stage 3,

would start to translate into strong on-site construction

activity in the coming quarters. Accordingly, BCA has

forecast that the growth of nominal construction

output will accelerate to 5–12% in 2012, from 1.2% in

2011. Against this backdrop, construction-related

loans, which contributed to a quarter of total domestic

non-bank loan growth thus far this year, should see

further gains.

Overall activity is likely to be on a gradual uptrend

for the rest of the year.

Growth prospects for the world economy have

improved since the last Review in October 2011 and

uncertainty over the Eurozone debt crisis has

diminished. The slowdown in Asia’s growth has been in

line with expectations and the steady improvements in

the US economy have provided some much-needed

support.

Chart 3.20

Resident Wages, Private Consumption

Expenditure and Retail Sales

Chart 3.21

Construction Contracts Awarded

2001 2003 2005 2007 2009 2011

-3

0

3

6

9

YO

Y %

Gro

wth

Resident Wages

Private Consumption Expenditure

Retail Sales ex- Motor Vehicles

2010 Q3 2011 Q3 2012

0

2

4

6

8

10

$ B

illi

on

Jan-Feb

Civil EngineeringNon-residential

Public ResidentialPrivate Residential



In line with these positive developments, the domestic

economy has also seen a turnaround. The drivers of

GDP growth this year will be skewed towards regional

and domestic services, in contrast to previous

recoveries. (Chart 3.22) This, to some extent, reflects

the continuing unevenness in the pattern of global

growth, with the Asian economies expected to

outperform the more sluggish industrialised

economies.

Nonetheless, there are downside risks to growth.

The structural challenges in the G3 economies will

continue to constrain overall demand and fresh bouts

of volatility in the external environment could dampen

still-fragile investor confidence, affecting both the

export-oriented sectors as well as the sentiment-

sensitive financial services. The domestic IT industry

will also have to grapple with tighter profit margins.

Thus, notwithstanding the strong Advance Estimates

for Q1 which confirmed that the Singapore economy

has turned the corner, the recovery is envisaged to

progress at a fairly moderate pace for the rest of 2012.

Chart 3.22

Contribution to GDP Growth


Towards Sustainable Long-term Growth

Supply-side constraints underscore the need to shift

to a productivity-led growth model.

Cyclical developments aside, resource constraints will

become more binding over the next decade as the

Singapore labour force expands at a slower pace, with

baby boomers retiring and growth in foreign worker

inflows easing. Hence, the Singapore economy will rely

significantly less on increases in the labour force and

more on productivity growth.

The Economic Strategies Committee review in 2010 set

out broad strategies for firms to make the transition to

productivity-led growth. Schemes such as the

Productivity and Innovation Credit (PIC) were then

rolled out to encourage investment in R&D, innovation,

automation and training. The recent Budget also

provided enhanced support for SMEs to upgrade the

skills of their workers through various WDA-sponsored

courses.

2012F

0

20

40

60

80

100

% C

on

trib

uti

on

Manufacturing Services Others

Previous Recoveries(Average)

Outlook 47


However, the path to a productivity-led growth model

will involve some transitional costs. The series of

tightening measures to reduce the reliance on

low-cost foreign labour will confront businesses with

supply-side induced relative price adjustments over the

short term, which in turn will prompt shifts in

production and consumption. Nevertheless, given

adjustment lags, the average level of business costs and

consumer prices could be subject to some upward

pressure over the short term.

The supply-side adjustments will take place

over several phases.

The adjustments arising from a tighter labour market

over the next decade can be broadly divided into three

phases.

In the initial cost adjustment phase, wage and other

business cost pressures are likely to pick up.

Overall GDP growth will be relatively unaffected, as

firms rely on existing resources to fulfil orders.

In the consolidation phase, unit labour cost (ULC) will

rise as productivity enhancement measures take time

to bear fruit. Accordingly, a supply-side induced

slowdown in growth may take place and wage costs

could continue to be passed through to consumer

prices.

In the sustainable phase, the economy will reap the

fruits of the productivity-enhancement measures taken

during the first two phases, possibly in the second half

of this decade. GDP growth will pick up gradually,

as firms become more efficient and capital-intensive.

As productivity improvements kick in and wage

pressures subside, ULC growth will moderate and other

price pressures will start to come down in line with

these adjustments.

The cost of adjustment will differ across sectors.

The impact of the first two phases of adjustment will

vary across sectors and firms. Firms which rely heavily

on labour (low capital-to-labour ratios) and have low

profit margins will be confronted with larger increases

in operating costs during this period, and will face

greater challenges in absorbing them.



Consumer-centric firms in the food & beverage, and

recreation, community & personal services sectors tend

to have a high wage share of operating expenditure

and lower profit margins. (Chart 3.23) Further

disaggregation suggests that the SMEs (except for

those in the healthcare sector) are, in general, more

likely to be affected by the rise in wage costs than the

bigger firms.

It is likely that these consumer-centric services firms

will pass on some of the wage increases to consumers.

However, given that these firms also face greater

competition due to their sheer numbers, this could cap

the extent of the pass-through. (Chart 3.24)

Notwithstanding these transitional pains, growth will

be more sustainable when it is underpinned by

productivity increases. This, however, will require

specific sectors to step up efforts to retool the

workforce for higher-value jobs. Services sectors in

general have tended to lag behind in this respect.

(Chart 3.25) While this may partly reflect the lower

elasticity of substitution between capital and labour in

the services industries, there is still scope for further

automation and training of workers to enable them to

take up higher-skilled jobs. (See October 2011 Review

for details.)

A shift to slower but more sustainable

productivity-driven growth will support rising

real wages and standards of living.

In sum, Singapore will face increasing supply-side

constraints in the decade ahead. The next few years

will be critical. It is important for workers to be

re-skilled, while companies undertake the necessary

investments in capital and productivity-enhancing work

processes. Businesses must also tap on the existing

pool of older workers more effectively. In the longer

run, a productivity-driven growth model will be a better

outcome for Singapore as it will provide sustainable

increases in real wages, and higher living standards

over time.

Chart 3.23

Wage Share and Profit Margins


Chart 3.24

Wage Share and Competition in

Services Sectors


* Competition is proxied by the number of

establishments per unit of value added.

Chart 3.25

Trend Productivity Growth, 2000–11


0 10 20 30 40 50

Profit Margin (%), Avg 2005-09

0

10

20

30

40

50

Ex

pe

nd

itu

re (

%),

Av

g 2

00

5-0

9

Wa

ge

Sh

are

of

Op

era

tin

g

Wholesale TradeChemicals

ElectronicsRetail Trade

Gen Mfg

I&CPrec Eng

T&S

Biomedical

Accom Svc

Recre & CSP

F&BBiz Svc

Trans Eng

0 1 2 3 4 5

Competition*, 2009

0

10

20

30

40

50

Ex

pe

nd

itu

re (

%),

20

09

Wa

ge

Sh

are

of

Op

era

tin

g

Wholesale Trade

T&S

Retail Trade

I&C

Accom Svc

Recre & CSP

F&B

Biz Svc

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

Av

era

ge

YO

Y %

Gro

wth

A&F

Svc

F&I Oth

Svc

T&S I&C W&R Svc MfgBiz

Svc

Outlook 49


Box A

The Short-term Wealth Effects of Property and Stock Prices in Singapore

In recent years, there have been sharp fluctuations in property and stock prices in many countries. This has

attracted the attention of policymakers concerned about their implications for consumer expenditure,

especially in the short term. Invariably, this has led to a renewed interest in the wealth effects of these

commonly-held assets on consumer spending. Studies that have examined the empirical linkages between

wealth and consumption have generally found a significant and positive relationship between them. Among

these are Lettau and Ludvigson (2004) and Davies and Palumbo (2001) in the US, Fernandez-Corugedo et al.

(2003) in the UK, and Tan and Voss (2003) in Australia. Many of these studies, however,

use panel datasets, and the results obtained are likely to be sensitive to the choice of the countries that

form the panel, as well as the time period used.

Heightened activity in the local property market in recent years and the increasing level of interest in the

stock market, have also raised similar questions regarding the wealth effects of these assets in Singapore.

This box item takes a closer look at the evidence for Singapore and utilises a time-series data approach.

Contrary to the findings for the US, UK and Australia, neither stock nor property prices appear to have a

significant impact on consumer expenditure in Singapore in the short term, and the results are consistent

across quarterly and monthly samples.

Methodology

To capture the short-term wealth effects, the error-correction model (ECM) shown in equation (1) below

was used. The ECM incorporates short-run dynamics as well as the long-run equilibrium relationship

between real private consumption per capita and asset prices.

( ) ( ) ( )α β δ γ ε−∆ = ∆ + ∆ + ∆ + +1t t t t t tc y A m ECT (1)

In equation (1), c is the log of real private consumption per capita, y is the log of real GDP per capita,

m is the log of real broad money supply per capita, At is the log of the asset price index, ECT is the

error-correction term,1/

and ∆ is the first difference operator. To estimate the wealth effect of stock prices,

the Straits Time Index (STI) is used as the asset price index, At. For property prices, the Property Price Index

(PPI) was used.

Also, to capture asymmetric effects in asset prices ΔAt is decomposed into its positive and negative

components, and equation (1) is re-estimated with dummy variables as follows:

( ) ( ) ( ) ( )α β β δ γ ε+ + − −

−∆ = ∆ + ∗∆ + ∗∆ + ∆ + +1t t pos t neg t t t tc y D A D A m ECT (2)

where Dpos*ΔAt+ and Dneg*ΔAt

� refers to positive and negative movements in the relevant asset market index,

respectively. Dpos is a dummy variable that takes the value of one when changes are positive, and is zero

otherwise, while Dneg takes the value of one when changes are negative, and is zero otherwise. Equation (2)

is first estimated using quarterly data and then re-estimated with monthly data, but consumption per capita

is replaced with retail sales2/

and the real GDP per capita and real broad money supply per capita variables

are excluded.

____________________________________________________________________

1/ The presence of a wealth effect on consumption is not inextricably linked to error-correcting behaviour in

consumption. While the error-correction mechanism indicates the time needed for the long-run relationship to be

restored after a shock, it tells us nothing about the magnitude of the wealth effect.

2/

The analysis was also conducted with sub-categories of retail sales, such as motor vehicles. However, cointegration

tests were unable to detect the presence of a long-run relationship between these variables and the two asset prices.



Estimation Results

In Table A1, the first four rows present the main results for both equations using quarterly data, with β, β+,

and β−

signifying the appropriate short-term wealth effects. Monthly data is for the period from January

2000 to August 2011, with a slightly shorter estimation window for property prices due to the lack of

monthly data on PPI before January 2004. For quarterly data, the estimation period is from Q1 1983 to

Q2 2011.

The quarterly estimates of β in the first two rows show that there are no significant short-term wealth

effects arising from either the stock or property market. However, when the asymmetric effects of asset

price changes are included, a 1.0% increase in property prices in the short term is associated with a 0.12%

fall in real private consumption per capita (row 4), but has no significant impact when property prices fall.3/

This finding resonates with the arguments in Phang (2004) that anticipated house price increases have a

dampening effect on aggregate consumption in Singapore, which can be attributed to the negative wealth

effect of price increases on those seeking to enter the property market or to upgrade to better housing.

Indeed, when total loans per capita is added to the model, the short-term wealth effect of rising property

prices becomes insignificant.

For the monthly data with retail sales in place of consumption per capita, the short-term wealth effect is

only significant for stock prices, with a 1.0% increase in stock prices leading to a 0.07% increase in the retail

sales index (row 5). However, this result is sensitive to the estimation period used, as the short-term wealth

effect disappears when the model is re-estimated from 2005 to 2011. Also, there are no discernible short-

term asymmetric wealth effects for stock or property prices (see last two rows). In all cases,

the coefficient on the error-correction term, 4/

denoted �, is of the correct sign and statistically significant.

Regression diagnostics also confirm that the models are correctly specified.

Table A1

Main Estimation Results

Asset Eqn β β+

β− γ

Using quarterly data

Stock 1 0.027 - - −0.246*

Property 1 −0.041 - - −0.197*

Stock 2 - 0.071 −0.013 −0.246**

Property 2 - −0.118*** 0.124 −0.216***

Using monthly data

Stock 1 0.068** - - −0.048***

Property 1 0.206 - - −0.124**

Stock 2 - 0.086 0.057 −0.049***

Property 2 - 0.229 0.185 −0.128***

Note: Standard errors are based on the Newey-West heteroskedasticity-adjusted covariance estimator.

*** Statistically significant at the 1% level.

** Statistically significant at the 5% level.

* Statistically significant at the 10% level.

____________________________________________________________________

3/ In the ECM without the asymmetric effects of property prices (results reported in the second row of Table A1), the

wealth effect of property prices is also negative (β = −0.041), although this was not staSsScally significant.

4/

The long-run parameters of the cointegrating regression for all the models are estimated using single equation OLS.

Outlook 51


Sum-up

This box item has used an error-correction model to investigate the relationship between stock and

property prices and consumer expenditure in Singapore. Our findings suggest that there is little evidence

that stock or property prices have significant effects on consumer expenditure in the short term. Although

stock prices appear to have some impact when monthly data is used, this was sensitive to the estimation

period chosen. Moreover, while a negative wealth effect was observed in the property market using

quarterly data, this was no longer significant when total loans per capita was added to the model.5/

Nonetheless, the findings in this box item should be taken as tentative since a more complete analysis of

wealth effects requires appropriate controls for socioeconomic characteristics, and agents’ expectations

that may affect both expenditure and wealth.

References

Abeysinghe, T and Choy, K M (2007), The Singapore Economy: An Econometric Perspective, Routledge

Publishing.

Davis, M A and Palumbo, M G (2001), “A Primer on the Economics and Time Series Econometrics of Wealth

Effects”, Federal Reserve Board Working Paper 2001–9.

Fernandez-Corugedo, E, Price, S and Blake, A (2003), “The Dynamics of Consumer Expenditure: the UK

Consumption ECM Redux”, Bank of England Working Papers No. 204.

Lettau, M and Ludvigson, S C (2004), “Understanding Trend and Cycle in Asset Values: Re-evaluating the

Wealth Effect on Consumption”, American Economic Review, Vol. 94(1), pp. 276–299.

Phang, S Y (2004), “House Prices and Aggregate Consumption: Do They Move Together? Evidence from

Singapore”, Journal of Housing Economics, Vol. 13(2), pp. 101–119.

Tan, A and Voss, G M (2003), “Consumption and Wealth in Australia”, Economic Record, Vol. 79(244),

pp. 39–56.

____________________________________________________________________

5/ These findings are generally consistent with those of Abeysinghe and Choy (2007).



3.3 Labour Market

Labour Market Tightness to Persist

Although employment is likely to grow at a slower pace

in 2012, the labour market will remain tight because of

greater supply constraints, in part reflecting further

tightening of the foreign labour policy. As such,

the resident unemployment rate this year could remain

low at around its current level of 2.9%, while resident

wage growth is expected to be firm.

Labour demand will pick up gradually

from the low in Q1 2012 ...

Employment growth likely weakened in Q1 2012

following retrenchments in the trade-related segments.

However, there are early signs that hiring sentiment is

gradually improving in tandem with the more positive

economic outlook. The latest Manpower Employment

Outlook survey, for instance, shows a slight uptick in

hiring sentiment in Q2 2012 compared to Q1, led by

construction, wholesale & retail trade and public

administration & education. (Chart 3.26) The latter, in

particular, was the most optimistic in hiring

expectations.

... with services forming the bulk of

employment gains.

Job creation in services, especially in the domestic-

oriented industries, will provide underlying support to

the labour market, and help absorb workers retrenched

from other sectors. Indeed, the number of vacancies in

the services sector remained high in Q4 2011.

(Chart 3.27) At the same time, the low resident

unemployment rate suggests that a substantial number

of foreigners will be needed to fill jobs in services and

construction. Nonetheless, the continued tightening of

foreign labour policy will slow the inflow of foreign

workers from the average of 88,400 p.a. over the last

five years. In 2012, hiring of employment pass holders

(EPH) will be restricted by higher qualifying salaries and

education criteria, while the increase in work permit

holders (WPH) will be moderated by the hike in foreign

worker levies and the new Dependency Ratio Ceilings

(DRC).5 (Table 3.3)

Chart 3.26

Net Employment Outlook and

Total Employment Change

Source: ManpowerGroup

Chart 3.27

Vacancies by Sector


Table 3.3

DRCs across Sectors

Dependency Ratio Ceilings (DRC)

Manufacturing Services

Current 65% 50%

July 2012 60% 45%

S Pass Sub-DRC

Current 25%

July 2012 20%

5 Companies that are already at or above the new DRCs will not be able to bring in any more WPHs or S Pass holders from

July 2012. Companies that have already exceeded the quota will be given until June 2014 to comply with the new DRCs.

2004 2006 2008 2010 2012

-80

-40

0

40

80

Pe

r C

en

t

-30

0

30

60

90

Th

ou

sa

nd

Net Employment Outlook (LHS)

Employment Changes(RHS)

Q2

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

80

100

120

140

160

180

Ind

ex

(Q

1 2

01

0=

10

0),

SA

Construction

Manufacturing

Services

Outlook 53


Wage growth will be firm this year,

but lower than in 2011.

Resident wage growth likely eased further in Q1 2012.

While wages are expected to pick up subsequently

amid the tight labour market, the increase will be more

moderate compared to that in 2010 and H1 2011.

(Chart 3.28) The series of upward wage revisions

announced this year in community, social & personal

services and transportation & storage are responses to

the difficulty of filling up vacancies in these sectors.6

For the economy as a whole, competition for resident

workers is set to keep resident wage growth in 2012 at

around its historical average. With labour productivity

growth remaining subdued, unit labour cost will

continue to rise in 2012, albeit at a more moderate

pace than in 2011.

Over the medium term, the labour market

will be tight ...

In the years ahead, the labour force participation rate

(LFPR) will come under increasing downward pressure

as a larger share of residents move into the older age

groups where participation rates are markedly lower.

(Chart 3.29) Coupled with a tighter immigration policy,

resident labour force growth will slow considerably,

keeping labour supply fairly constrained.

Nonetheless, recent developments in the labour

market could ameliorate the structural slowdown in

labour force growth. In particular, there has been a

secular trend of rising part-time employment that could

boost the LFPR. The share of part-time workers in

resident employment has grown from 6.3% in 2006 to

9.7% in 2011, representing almost 200,000 resident

workers. (Chart 3.30) This trend is expected to

continue as rising demand for workers in the

hospitality-related and retail trade segments, with their

prevalence of flexible working arrangements and

shorter working hours, attract older workers and

residents currently outside the labour force.

Chart 3.28

Resident Unemployment Rate and

Nominal Wage Growth

Chart 3.29

Distribution of Resident Labour Force

by Age

Chart 3.30

Residents Employed on Part-time Basis

6 This includes wage adjustments for bus drivers as well as workers in healthcare, social work and public administration.

2005 2007 2009 2011

-6

0

6

12

% Y

OY

2

3

4

5

Pe

r C

en

t, S

A

Nominal Wage Growth (LHS)

Resident Unemployment

Rate (RHS)

Q4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65-6

9

70 &

Ove

r

0

4

8

12

16P

er

Ce

nt 2011

2001

2006 2007 2008 2009 2010 2011

6

7

8

9

10

Pe

r C

en

t

0

50

100

150

200

Th

ou

sa

nd

Part-time Employed Residents (RHS)

Part-time Share of Employed Residents (LHS)



In addition, the FY2012 Budget announcement of

higher employer CPF contributions for Singaporeans

aged 50-65 could encourage older workers to stay in

the workforce, while subsidies to firms for hiring older

workers (Special Employment Credit) will complement

it by increasing the demand for such workers.7

The SEC will also be helpful in increasing the

employability of older retrenched workers. The

inability of retrenched workers over 40 years of age to

find work following the Global Financial Crisis was the

main reason why the overall re-entry rate into

employment has remained below its pre-crisis average.

(Chart 3.31)

... and push up residents’ wages,

including that of low-skilled workers.

However, the data also shows that the re-employment

rate of residents in lower-skilled occupations

has recovered strongly compared to that of their

high-skilled counterparts. (Chart 3.32) This is in spite

of the fact that almost two-thirds of all low-skilled

resident workers are above 50 years of age, where

employability is low as discussed above.8 This suggests

that the demand for low-skilled workers is strong,

or supply is particularly constrained.

Together with the revised foreign labour policy, which

is relatively skewed against low-skilled foreign workers,

the large share of older residents that will soon retire

from low-skilled jobs will severely constrain their

supply. Thus, relative wages of low-skilled workers in

Singapore could rise more rapidly over the medium

term. Indeed, the wage growth of the bottom deciles

outstripped that of higher income workers in 2011—

a stark change from the trend in the preceding decade.

(Chart 3.33)

Chart 3.31

Rate of Re-entry into Employment of

Retrenched Resident Workers by Age

* Data prior to 2008 are EPG, MAS estimates.

Chart 3.32

Rate of Re-entry into Employment of

Retrenched Resident Workers by Occupation

Chart 3.33

Average Monthly Household Income from

Work per Household Member

7 A Special Employment Credit (SEC) will be provided to employers for their Singaporean workers aged 50 and above and

earning up to $3,000 per month. The SEC will be 8% of wages. A smaller SEC will also be provided for workers with a

monthly wage of between $3,000 and $4,000. The SEC will cover almost 350,000 workers, or four-fifths of older

Singaporean workers.

8 Low-skilled resident workers are defined as those that have less than a full secondary school education.

1997 1999 2001 2003 2005 2007 2009 2011

40

50

60

70

80

Pe

r C

en

t

40 & Over*

Overall 30-39

15-29

2000 2003 2006 2009

40

50

60

70

80P

er

Ce

nt

Production & Transport Operators, Cleaners & Labourers

Professionals, Managers, Executives & Technicians

Clerical, Sales & Service Workers

2011

1 2 3 4 5 6 7 8 9 10

Decile

0

2

4

6

8

10

12

YO

Y %

Gro

wth

2001-2010(Average)

2011

st nd rd th th th th th th th

Outlook 55


3.4 Inflation

Core Price Increases will Moderate to their Historical Average

Higher wages and global oil prices

will support core inflationary pressures.

The strong consumer price increases in early 2012 were

the result of the pass-through of cost pressures

accumulated over the previous two years. While the

pace of subsequent price increases will ease from the

high seen earlier this year, overall inflation will remain

firm.

Notably, the interaction between the cyclical demand

uplift and tight resource constraints will support

business costs and lead to some further price increases,

especially in the services sector.

On the external front, geopolitical tensions could keep

global oil price pressures elevated. However, other

imported inflationary pressures should stay benign

before picking up moderately towards the end of the

year when the global economic recovery is expected to

be stronger. (Chart 3.34)

Cumulatively, these developments will lead to

sequential MAS Core Inflation that is close to its

historical average. On a y-o-y basis, both CPI-All Items

inflation and MAS Core Inflation are expected to

remain elevated and ease only gradually over 2012.

Rising labour costs and resilient domestic demand

will increase services fees further, but at a

more moderate pace.

The strong sequential increases in services fees in late

2011 and early this year was a consequence of the

widespread pass-through of pent-up costs in the face of

resilient consumer demand. Indeed, EPG’s empirical

research suggests that the estimated short-run pass-

through coefficient of ULC to CPI inflation has risen

slightly in recent quarters.9 (Chart 3.35) However,

the long-run ULC coefficient has remained stable,

suggesting that the pickup in the pass-through effects

may only be temporary.

Chart 3.34

Foreign Wholesale Price Index and

Singapore’s Import Price Index

Note: Foreign Wholesale Price Index is computed

from the wholesale price indices or producer price

indices of Australia, China, France, Germany, Hong

Kong, India, Indonesia, Japan, Korea, Malaysia, the

Philippines, Taiwan, Thailand, UK and US, and is

weighted by the share of Singapore’s imports from

these economies.

Chart 3.35

Short-run Pass-through Coefficient of ULC

to CPI Inflation


9 The pass-through effects of the S$NEER on the CPI encompasses two stages: from foreign prices to domestic import

prices, and the transmission from domestic import prices to the CPI. A system of error-correction models was used to

capture the long-run relationships, as well as short-run dynamics between the CPI, foreign prices, the S$NEER, and ULC.

The short-run coefficients were estimated recursively to capture changes as new information is incorporated.

2007 2008 2009 2010 2011 2012

-15

-10

-5

0

5

10

15

20

YO

Y %

Gro

wth

Q1

FWPI

IPI

2001 2003 2005 2007 2009 2011

-0.04

-0.02

0.00

0.02

0.04

0.06

0.08

0.10

Esti

mate

d C

oeff

icie

nt

Valu

e

ULC 95% Confidence Interval

Q4



For the rest of the year, given the anticipated rise in

wages, there could be further services fee adjustments,

especially in H2 2012. Nevertheless, in view of the

considerable cost pass-through that has already taken

place, further price increases will be more moderate

than in Q1, especially as wage pressures have subsided

from the high in 2010 and H1 2011. For the whole of

2012, services inflation will probably average around

3%, up from 1.6% last year.

Geopolitical tensions will keep

global oil prices elevated.

The improving economic outlook, particularly in the US,

is expected to support global oil demand this year.

At the same time, there has been a spate of supply

disruptions resulting in low surplus production capacity

in OPEC and below-average inventories in the OECD

countries. (Charts 3.36 and 3.37)

The International Energy Agency (IEA) estimated that

Iran’s oil exports could be curtailed by slightly below

one million barrels per day from July 2012, when the

EU embargo is implemented and broader US and EU

economic sanctions on the Iranian central bank take

effect.

With this in mind, the US Energy Information

Administration (EIA) now expects the price of the WTI

benchmark to rise further in H2 2012 and average

US$106 for the whole of 2012. This was higher than

the US$100 forecast made two months ago. Based on

this price assumption, the prices of direct oil-related

items in the CPI will rise by close to 10% this year,

slightly lower than the increase in 2011.

However, an escalation in geopolitical tensions

surrounding Iran constitutes the greatest risk to the oil

price forecasts as there is little buffer among OPEC

suppliers to ramp up production in the short term.

Chart 3.36

OPEC Surplus Oil Production Capacity

Source: EIA

Chart 3.37

OECD Commercial Oil Inventories

Source: EIA

2007-11 2011 2012

0

1

2

3

4

Mil

lio

n b

pd

Average Jan-Mar Jan-Mar

2007 2008 2009 2010 2011 2012

25

26

27

28

Mil

lio

n b

pd

2007-11 Average

Mar

OECD End-of-period Commercial Inventory

Outlook 57


Domestic retail food prices will edge up

due to the pass-through of business cost increases.

The moderation in global food prices throughout most

of 2011 will continue to dampen imported food

inflation. (Chart 3.38) Nevertheless, domestic retail

food prices will likely rise moderately on a sequential

basis for the rest of the year, as firms continue to pass

on higher business costs to consumers. In addition,

there are other latent food commodity price increases

that have yet to filter through to consumer prices.

For instance, the spike in Thai rice prices following the

flood late last year has yet to be fully reflected in retail

prices, as supermarkets promised to hold house-brand

prices stable until the end of June.

For the whole of this year, food inflation is projected to

ease only slightly from the 3.1% in 2011.

Accommodation cost will be the largest contributor

to inflation given tight supply in the HDB segment.

Demand for rental housing will increase given the

continued, albeit lower, foreigner worker inflows.

On the supply side, the number of newly completed

private residential units in 2012 is expected to be

almost double the average in the past ten years.

This will, in turn, gradually exert downward pressure on

private residential property rentals.

In the HDB segment, however, the increase in demand

for rental flats will come up against tight supply.

As such, HDB leasing contracts will continue to be

renewed at rental rates that are considerably higher

than those under existing contracts.

Overall, the rise in accommodation cost, on a year ago

basis, will moderate slightly from 9.4% in 2011.

Nonetheless, it will remain the largest contributor to

CPI-All Items inflation this year.

Car prices could rise

if there is a further sharp cut in COE quotas.

After falling in December 2011 and January 2012,

average car COE premiums surged by 30%, reaching a

record high of $74,351 in April. This resulted from

a pickup in buying interest, buoyed by the launch of

new luxury models. In addition, there were rising

concerns over the likelihood of another sharp cut in

COE supply in August, possibly to a record low, should

Chart 3.38

FAO, IPI and CPI Food Inflation

Source: FAO

2007 2008 2009 2010 2011 2012

-8

-4

0

4

8

12

16

% Y

OY

-40

-20

0

20

40

60

80

-40

% Y

OY

Q1

Imported Food (LHS)

CPI-Food (LHS)

FAO (RHS)



the recent weakness in car de-registration persist.

(Chart 3.39) In this instance, car COE premiums could

rise even further in H2 2012. EPG’s current projection

is for private road transport cost, excluding petrol,

to rise by around 10% this year, on the back of a 16%

increase in 2011.

CPI-All Items inflation and MAS Core Inflation

forecasts have been revised upwards.

Gradually improving economic growth prospects,

coupled with tightness in the labour market, will

lead to further price increases in the economy.

The contributions to CPI inflation, however, are varied.

Relative to the historical average, the CPI-All Items will

rise more quickly at around 1% q-o-q for the rest of the

year, led by residential property rentals and COE

premiums. MAS Core Inflation will continue to rise at

close to its past ten-year average of 0.4%.10

In y-o-y terms, CPI-All Items inflation and MAS Core

Inflation will ease modestly through the year but along

somewhat elevated trajectories. CPI-All Items inflation

could average around 5% in H1 before easing in

H2 2012. (Chart 3.40) MAS Core Inflation will likely

moderate gradually over the course of the year to

around 2.5% in Q4.

For the year as a whole, CPI-All Items inflation is now

expected to be 3.5–4.5% while MAS Core Inflation

will likely be in the range of 2.5–3.0%, up 1% point,

in both cases, from the earlier forecasts. The revision

in the CPI-All Items inflation forecast reflects

higher-than-expected contributions from prices of cars,

services and oil. Accommodation cost will still be the

largest contributor, adding more than one-third to

CPI-All Items inflation in 2012, while prices of cars,

services and commodity-related items will each

account for one-fifth.

Chart 3.39

Average Monthly Car De-registrations

Chart 3.40

CPI-All Items Inflation & MAS Core Inflation

Forecasts


10

For a detailed review of MAS Core Inflation, refer to Ong, D, Soo, C G, Choy, K M and Ng, B E (2011), "A Review of the

Core Inflation Measure for Singapore", MAS Staff Paper No. 51.

2010 2011H1 H2 2012Q1

0.0

0.5

1.0

1.5

2.0

Th

ou

sa

nd

2007 2008 2009 2010 2011 2012

-2

0

2

4

6

8

% Y

OY

MAS Core Inflation

Q4

Forecast

CPI- All Items Inflation

Outlook 59


3.5 Assessing the Macroeconomic Policy Mix

Monetary Policy

The monetary policy stance was tightened in April

2012 in view of sustained inflationary pressures.

Following the slowdown in H2 2011, economic activity

in Singapore picked up in Q1 this year, with GDP

expanding by 9.9% on a q-o-q SAAR basis. This was

underpinned by the recovery in electronics

manufacturing and trade from the supply disruptions

late last year. The services sector was also supported

by strong growth in the financial and tourism

industries. Although demand from the advanced

economies is expected to remain fairly muted, the tail

risks to the global economy have receded in view of

the ECB’s longer-term refinancing operations (LTRO)

and the successful Greek debt swap. Meanwhile,

domestic demand will continue to buttress growth in

Asia ex-Japan. Against this backdrop, the Singapore

economy will expand at a modest pace of 1–3% this

year.

Core inflation has risen and is expected to stay

relatively firm in the near term. Notably, imported

inflationary pressures are likely to be sustained by the

rise in global oil prices. The output gap, while

narrowing from an estimated 3.3% in 2011, is still

projected to average over 1% of GDP this year.

(Chart 3.41) Thus, the labour market remains tight

even though resource utilisation and wage growth

could moderate. Some short-term cost-push inflation

will reflect supply-side constraints coming through

higher foreign worker levies and the reduction in

foreign worker Dependency Ratio Ceilings. For 2012,

CPI-All Items inflation and MAS Core Inflation are

projected to be 3.5–4.5% and 2.5–3.0%, respectively.

Accordingly, MAS announced on 13 April 2012 that it

would maintain the modest and gradual appreciation of

the S$NEER policy band. The slope of the policy band

was increased slightly, with no change to the level at

which it was centred. The width of the policy band was

also restored to its narrower setting.

This re-calibration of the policy stance also reflected

the medium-term impact of the supply-side

restructuring that is taking place in the Singapore

Chart 3.41

Real GDP and Output Gap


* EPD, internal estimates.2000 2002 2004 2006 2008 2010 2012F-4

-2

0

2

4

% o

f P

ote

nti

al

GD

P

150

200

250

300

350

$ B

illi

on

Potential GDP*

Actual GDP

Output Gap*



economy. While changes in the foreign worker policy

are necessary to ensure a more efficient allocation of

resources and a more productive workforce over the

medium term, the latter will take time to come to

fruition. Business costs are thus likely to increase

somewhat during the transition period and some of

these changes in relative factor costs will need to filter

through the economy before productivity gains catch

up and offset these cost increases. The tighter

monetary policy stance adopted in April 2012 is,

therefore, intended to temper, but not fully offset, the

pass-through of these supply-side cost increases, while

at the same time address the present cyclical tightness

in some factor markets.

The latest monetary policy announcement is thus a

measured move to facilitate ongoing supply-side

adjustments, while simultaneously anchoring inflation

expectations and keeping growth on a sustainable path.

Outlook 61


Fiscal Policy

The FY2012 Budget focused on medium-term

supply-side and social issues.

Budget FY2012 was delivered at a time when the

Singapore economy is undergoing important

structural changes. As the economy is expected to

continue expanding, albeit at a more modest pace

this year, the Budget focused on medium-term

initiatives tackling supply-side and social

challenges, rather than short-term measures to

boost demand. More specifically, the Budget

aimed to build up the long-term capacity of the

economy, strengthen the structure of social

support, and alleviate frictional costs during the

economy’s transition. The key Budget measures

are listed in Table 3.4.

There were measures

to support economic restructuring and

enhance productivity growth ...

The FY2012 Budget continued with measures to

build up the long-term capacity of the economy by

enhancing productivity growth. Further efforts

were made to reduce Singapore’s dependence on

foreign workers via a calibrated reduction in

Dependency Ratio Ceilings and increases in the

foreign worker levy. By raising the relative price

of low-skilled foreign labour and restricting their

supply, it is hoped that firms will adjust their hiring

and investment decisions towards re-training

staff, employing higher-skilled workers and/or

investing in productivity-enhancing equipment.

Other measures to help businesses restructure

and adapt to the new landscape of a tight labour

market include enhancements to the Productivity

and Innovation Credit Scheme introduced two

years ago. The enhanced scheme allows

businesses to get more cash payouts faster when

they invest in productivity-enhancing activities,

such as research and development, innovation,

automation and training. There was also

increased support for SMEs to train and upgrade

their workers and to develop new capabilities.

For example, the government will provide higher

subsidies for selected training courses and

increase the absentee payroll for SMEs.

The restructuring of the economy also requires

some business consolidation and acquisition to

take advantage of economies of scale, acquire

new capabilities and raise overall industry

productivity. In this respect, a 200% tax allowance

will be given to SMEs on the transaction costs

incurred during business consolidation. Further,

the Budget introduced measures to help

companies internationalise their operations

through project financing, trade financing,

and double tax deduction.

... and to increase support for the vulnerable

groups in our society.

Important measures were introduced in this

Budget to increase support for the economically

and socially vulnerable households—the elderly,

the disabled, and lower-income families.

New initiatives were put in place to incentivise

firms to hire and retain older workers and raise

retirement savings. For example, the government

is providing a Special Employment Credit (SEC)

from 2012 to 2016, which will subsidise 8% of the

wages of workers aged 50 and above, for those

with monthly incomes of up to $3,000.



At the same time, the Budget aimed to improve

the medical infrastructure, as well as the capacity,

quality and affordability of a wide range of health

services. These include plans to significantly step

up the development of the intermediate and long-

term care (ILTC) sector. With the first cohort of

Singapore’s baby boomers turning 65 years old in

2012 and the pace of population ageing

accelerating, the government is doubling its

annual expenditure on healthcare from $4 billion

to $8 billion over the next five years.

The Budget also aimed to improve social

outcomes for the disabled at different stages of

life. A Development Support Programme was

introduced to strengthen early intervention and

education for children with special needs, while

higher subsidies would be provided to improve

adult care for the disabled. In addition, the SEC

was extended to employers hiring workers with

disabilities.

The GST Vouchers institutionalises previously

ad hoc social support measures, thus providing

greater certainty to the lower- and middle-income

households. Comprising cash handouts, Medisave

top-ups and utility rebates (U-Save), the Vouchers

form the cornerstone of the government’s

permanent assistance scheme that will provide

relief to needy households in a targeted way.

To improve social mobility, education

opportunities for children from low-income

families have also been enhanced. For example,

subsidies for pre-school education and the MOE

Financial Assistance Scheme were expanded, with

the latter benefiting 40,000 more students.

The Budget provided relief

to alleviate transition costs.

The reconfiguration of business and social support

structures will take time. On the former, hiring

and investment planning, and the productivity

gains to be reaped therein, will only bear fruit in

the medium term. However, firms are already

bearing the frictional costs of adjustment

currently. It was thus appropriate that the Budget

provided measures to alleviate these transition

costs. For example, SMEs will receive a one-off

cash grant capped at $5,000 to offset higher

business costs during the economic slowdown.

On the social front, it was recognised that

boosting retirement savings by raising the

employer and employee CPF contribution rates for

workers aged 50–65 could have the unintended

effect of reducing older workers’ take-home pay

or disincentivise employers from hiring older

workers. The government therefore took a

holistic approach such that the burden of CPF

adjustments is offset by the SEC, higher Earned

Income Tax Relief, GST Vouchers, enhanced

medical subsidies, and other measures.

Outlook 63


Table 3.4

Key Initiatives of the FY2012 Budget

Economic Restructuring and Raising Productivity

• Reduction in Dependency Ratio Ceilings (DRC) for foreign workers

• Enhancements to Productivity and Innovation Credit (PIC) Scheme (increase in cash payouts and more

frequent payouts)

• Enhanced training support for SMEs and self-employed persons (through increased course subsidies and

absentee payroll cap)

• Increased grants for capability development for SMEs ($200 million over the next three years)

• Enhanced Special Employment Credit (SEC) to encourage employers to employ older Singaporean workers

($470 million per year)

• One-off cash grant to help companies offset higher business costs ($320 million in FY2012)

• Helping companies internationalise through project financing, trade financing and political risk insurance,

and double tax deduction

• Support for the tourism and marine & offshore sectors to enhance their competitiveness

Building a Fair and Inclusive Society

Rewarding Work for Elderly

• Higher CPF contribution rates for older workers

• Doubling of Earned Income Tax Relief for older workers ($30 million per year)

Helping Seniors Unlock Savings

• Silver Housing Bonus for elderly Singaporeans who sell their existing flats and move to 3-room and smaller

flats or Studio Apartments

• Enhanced Lease Buy back Scheme (LBS)

Stronger Healthcare Support

• More hospital beds

• Expansion of long-term and community-based care

• Higher subsidies in the Intermediate and Long-Term Care (ILTC) Sector

• Grant for hiring a foreign domestic helper to care for an elderly member at home

• GST absorption for subsidised patients in the ILTC Sector

• Enhancement for Active Seniors (EASE) Programme—subsidies for installing elderly-friendly features in

homes ($260 million over 10 years)

• Medifund Top-up ($600 million)

• One-off Medisave Top-up

Supporting Singaporeans with Disabilities

• Development Support Programme (DSP) to provide learning support intervention for pre-school children

with mild speech, language and learning delays

• Extension of Special Employment Credit (SEC) to employers that hire Persons With Disabilities (PWD) who

have graduated from VWO-run Special Education (SPED) schools

• Extension of Workfare Income Supplement (WIS) to all PWDs who have graduated from VWO-run SPED

schools

• Doubling of Handicapped Earned Income Tax Relief

• Increased capacity of Day Activity Centres for the disabled and disability homes

Uplifting Low-income Families

• Extension of pre-school subsidies

• Raising of household income ceiling for the MOE Financial Assistance Schemes

• Top-ups to School Advisory Committees/School Management Committees Funds

• Enhancement of the Student Care Fee Assistance (SCFA) Scheme (increased monthly household income

ceiling, and new per capita household income criterion)

• Top-ups to Edusave Endowment Fund ($200 million), ComCare Endowment Fund ($200 million) and

Community Organisations

• GST vouchers in the form of cash, Medisave and utility rebates ($3.6 billion over FY2012–16)

Enhancing Transport System

• Boosting the capacity of the public bus system

• Carbon Emissions-based Vehicle Scheme (CEVS) to give rebates to cars with low carbon emissions

• Lowering of special diesel tax for Euro V vehicles

• Removal of Additional Transfer Fee (ATF) levied on used-vehicle transactions



Table 3.5

Budget Summary

FY2011 Revised FY2012 Budgeted

$ Billion % of GDP $ Billion % of GDP

Operating Revenue 50.5 15.1 53.1 15.0

Total Expenditure 47.5 14.2 50.3 14.2

Operating Expenditure 35.9 10.7 37.5 10.6

Development Expenditure 11.7 3.5 12.8 3.6

Primary Surplus/Deficit (−) 3.0 0.9 2.8 0.8

Less: Special Transfers (excluding top-ups to

endowment/trust funds) 3.1 0.9 1.5 0.4

Basic Surplus/Deficit (−) (0.1) 0.0 1.3 0.4

Add: Net Investment Income/Returns Contribution 7.9 2.4 7.3 2.1

Less: Special Transfers (top-ups to

endowment/trust funds) 5.5 1.6 7.4 2.1

Budget Surplus/Deficit (−) 2.3 0.7 1.3 0.4

A small budget surplus is projected for FY2012.

In FY2012, the government is projected to post a small

budget surplus, amounting to $1.3 billion or 0.4% of

GDP. (Table 3.5 and Chart 3.42) The basic balance,

which is the primary balance less special transfers but

without taking into account top-ups to endowment and

trust funds, is estimated to be $1.3 billion. Notably,

in this Budget, substantially more funds have been set

aside in endowment and trust funds for future

spending. This largely reflected the newly-created GST

Voucher Fund and top-up to the existing Special

Employment Credit Fund, which amounted to $3.0

billion and $2.4 billion, respectively, to finance the

payouts under these schemes over the next five years.

There were also top-ups to the Medical Endowment

Fund, Community Care Endowment Fund and Edusave

Endowment Fund to augment the government’s

capacity for long-term investment in healthcare, social

assistance and education.

The fiscal impulse implies a slightly contractionary

stance in 2012.

The fiscal policy stance is estimated to be slightly

contractionary, with the fiscal impulse measure at

around −0.2% of GDP. Given that the output gap is still

positive, this policy stance is appropriate for the

economy during this stage of the business cycle.

(Chart 3.43)

Chart 3.42

Components of the Budget

* Excluding top-ups to endowment and trust funds.

Chart 3.43

Fiscal Impulse Measure and the Output Gap


1988 1992 1996 2000 2004 2008 2012F

Financial Year

-10

-5

0

5

10

$ B

illi

on

Primary Balance Special Transfers*

Budget Balance

Net InvestmentIncome/ReturnsContributionTop-ups to

Endowment and Trust Funds

1990 1996 2002 2008

-4

-2

0

2

4

% o

f G

DP

-4

-2

0

2

4

% o

f P

ote

nti

al

GD

P

OutputGap (RHS)

Fiscal Impulse Measure (LHS)

2012F

Outlook 65


The FI measure provides an indication of the short-term

aggregate demand stimulus arising from fiscal policy,

but does not fully quantify the impact of the budget on

the economy. To assess the effects of Budget FY2012

on GDP and consumer prices over 2012–13,

EPG simulated some of the key measures that would

affect households and firms using the Monetary Model

of Singapore (MMS). (Table 3.6)

The combined macroeconomic effects of these

measures affecting households and firms are reported

in Table 3.7. The results show that GDP growth would

be boosted by about 0.13% point from the baseline,

with the bulk of this coming from an increase in

private consumption due to the cash and U-Save

components of the permanent GST voucher system.

Concomitantly, the additional spending by households

will only impact the CPI marginally.

To help older workers better prepare for their

retirement, the CPF contribution rates for workers aged

50 years and above will be increased from 1 September

2012. To soften the impact of the higher CPF

contribution rates and to encourage firms to hire older

workers, the government enhanced the SEC scheme

and provided a one-off cash grant to SMEs. The model

simulation results show that these relief schemes

would more than offset the negative impact on GDP

caused by higher CPF contribution rates. In addition,

they would help to alleviate business costs, thereby

translating into lower consumer prices eventually.

Overall, the simulated measures of Budget FY2012 are

estimated to have a largely neutral impact on the

economy this year.

Table 3.6

Budget FY2012 Measures

Simulated in MMS $ million

Measures Amount

in 2012

Amount

in 2013

Affecting Households

GST Voucher: Cash 380 380

GST Voucher: U-Save 88 175

Affecting Firms

Higher CPF rates 48 190

Special Employment

Credit 353 470

SME Cash Grant 240 80

Total

1,100

(0.3% of

GDP)

1,300

(0.4% of

GDP)

Table 3.7

Impact of Selected Budget Measures on

GDP Growth and CPI Inflation % point deviation

2012 2013

GDP Growth 0.13 −0.02*

CPI Inflation 0.01 0.08

* The measures will raise GDP levels in 2012 and

2013. However, with the higher GDP level in 2012,

GDP growth in 2013 will be lower than the baseline.

Special Features



Wages and Export Prices in China:

Implications for Global Inflation

Introduction

Following double-digit global inflation during the

1990s, the world economy experienced a

sustained stretch of relatively mild price increases

in the decade that followed. One of the factors

thought to have driven this moderation in

inflation was China’s integration into the global

trading system as the dominant supplier of

manufactured goods to the rest of the world.

During the 2000s, China’s share of global trade

rose dramatically while its export prices were kept

in check by an abundant supply of low-cost

labour, prompting some analysts to argue that the

country was exporting deflation to the advanced

economies (OECD, 2006; Kamin et al., 2006).

More recently, however, concerns have risen over

whether China’s booming imports may have

boosted international commodity prices

(IMF, 2011). Concurrently, demographic trends,

together with other structural factors, are causing

marked shifts in labour supply in China. Nominal

wages, which have generally risen in tandem

with improving productivity in the industrial

sector over the last decade, have accelerated

by 10–20% p.a. in recent years. This has led

some observers to conclude that China’s

“Lewisian turning point”—the point where surplus

rural labour runs out—has arrived, thereby

precipitating wage and price pressures.

This Special Feature investigates the empirical

nexus between labour costs and export prices

in China using time series econometrics.

More specifically, it examines how the evolution

of China’s wage and productivity dynamics has

affected global inflation outcomes over the last

decade by analysing the behaviour of import

prices in the two major trading centres of

Hong Kong and Singapore, as a proxy for Chinese

export prices. Examining this pass-through,

after taking into account changes in other

production costs, price mark-ups, and exchange

rate fluctuations, will help to ascertain whether

China will reverse its erstwhile role of making

goods cheaper for global consumers.

China’s Impact on Global Inflation Trends

In the years following its accession to the WTO in

2001, China was seen as a source of downward

pressure on global prices. While most observers

attribute this to the country’s intrinsic

competitiveness in producing labour-intensive

commodities, others claim that excess capacity in

the manufacturing sector has caused goods prices

to decline and spill over to the rest of the world

through cheap exports. Academic studies have,

however, found the evidence for China exporting

deflation to be mixed at best.

Special Feature A

Special Features 69


Using regression analysis to model both the direct

and indirect channels of price transmission,

Kamin et al. (2006) found no conclusive evidence

that growth in Chinese exports had a deflationary

impact on US import and producer prices.

For manufactured goods, such as textiles and

steel products, they noted that a 1.0% point

increase in the share of imports from China was

associated with a 0.8% point decrease in annual

import price inflation. Nevertheless, the relatively

low share of imports in US GDP of about 12%

meant that the impact of Chinese imports on US

consumer prices would have been quite small.

Indeed, the authors showed that China’s exports

have lowered annual import price inflation in a

large group of OECD countries by only a quarter

of a percentage point or less on average since

1983.

Relying on a vector autoregression (VAR)

methodology, Feyzioglu and Willard (2006)

similarly concluded that Chinese inflation had no

significant effect on US and Japanese inflation at

the aggregate level, although there was some

evidence of sector-specific linkages between

prices in China and the US, especially for final

manufactured goods. Overall, their results do not

support the claim that inflation declined in several

countries because of China’s increasing role in the

world economy.

More recently, however, attention has turned to

China’s rising wage levels and widespread

increases in minimum wages across the country.

Observers noted that labour cost increases in the

coastal areas that are in excess of productivity

gains added to supply-side inflationary pressures.

Furthermore, the potential onset of the Lewisian

turning point (see Box B for a survey of views on

this issue) has raised the question of whether

China would pass on continually rising wage costs

to global consumers via higher prices for its

manufactured products.

In related research, at least one study has shown

that prices in the Asian countries are sensitive

to inflation developments in China. Notably,

the IMF (2011) found that a 1.0% point increase in

China’s inflation induced by a food supply shock

could cause prices to increase by about

0.25% point across the region. In contrast,

demand shocks emanating from China spilled

over to Asian countries mainly through their

impact on global commodity prices and the

subsequent effects on domestic food and energy

costs.

Methodology and Data

In this Special Feature, to determine whether

wage increases in China have been a significant

factor behind its recent export price increases,

a structural supply-side framework in the vein

of Kravis and Lipsey (1977) is adopted.

This approach isolates the impact of unit labour

costs (ULC) on export prices (P) after controlling

for the effects of changes in raw material costs

(MAT), the producer price mark-up (PROFIT), and

nominal exchange rate movements (EXCH):

β β β

β β ε

= + +

+ + +

0 1 2

3 4

ln( ) ln( ) ln( )

ln( ) ln( )

t t t

t t t

P ULC MAT

PROFIT EXCH (1)

Since all variables are in natural logarithms,

the parameters are elasticities. Equation (1) is

also consistent with the specifications adopted in

the literature on exchange rate pass-through.1

As the time series on China’s export prices is too

short for estimation purposes, the empirical

strategy adopted here is to use the import price

indices of major importing countries as a proxy.

The obvious choice is Hong Kong’s import price

index for merchandise goods sourced from China,

which has been compiled since the early 1990s.

This series closely mirrors China’s export prices,

since the territory has long served as a hub for

1 See Goldberg and Knetter (1997) for a survey of the pass-through literature.



re-exporting mainland goods to the world.

The other import price index examined is that of

Singapore, which plays a similar entrepôt role.2

Since China exports mostly manufactured

products, the first regressor in equation (1) is the

unit labour cost in its industrial sector, computed

using time series data from Q1 2000 on

value-added, employment and nominal wages.3

Chart 1 depicts the co-movements between this

series and the two import price variables.

Compared to average wages, the ULC measure is

a better gauge of cost pressures as it takes into

account the assertion that China can maintain its

export competitiveness despite substantial wage

increases by virtue of significant improvements in

workers’ productivity.

The raw materials sub-index of China’s producer

price index is utilised as a proxy for the second

regressor, raw material costs. Following Mallick

and Marques (2008), an estimate of corporate

profit margins in China is taken as the measure

of the producer mark-up over marginal costs.4

As the import price variables are denominated

in local currencies, the bilateral exchange

rate with respect to the Chinese renminbi is also

incorporated as an additional explanatory variable

in equation (1) to capture the exchange rate

pass-through effect.

2 As there is no readily available import price index in Singapore for products from China, a unit value index was created by

aggregating SITC 7-digit trade data provided by IE Singapore.

3 Mining, utilities and construction are included in this classification, although their weights are relatively small.

4 The series used was compiled by the IMF.

Chart 1

Import Prices and China’s ULC (Q1 2000–Q3 2011)

2000 2003 2006 2009

4.4

4.5

4.6

4.7

4.8

4.9

5.0

Ind

ex

(in

Lo

gs

)

Hong Kong Import Prices

Singapore Import Prices

2011Q3

China ULC

Special Features 71


Box B

Has China Reached its Lewisian Turning Point?

The Lewis Model of Dualistic Development

In his paper “Economic Development with Unlimited Supplies of Labour” published in 1954, Sir W.A. Lewis

rejected the neoclassical assumption of limited labour supply, and postulated that in developing countries,

an unlimited supply of unskilled rural labour from the “subsistence” or agricultural sector is available for

employment in the growing “capitalist” or industrial sector in the early stages of economic development.

The labour surplus in the agricultural sector allows the expanding industrial sector to obtain the required

labour at constant low wage rates and grow through capital accumulation. However, when the surplus runs

out, wages will start to rise in both sectors, such that the inter-sectoral wage differences will begin to fall.

The point of reversal was later termed the “Lewisian turning point”.

Applying the Lewis Model to China

China’s spectacular economic growth over the last three decades, driven in part by large-scale labour

migration from the low productivity rural sector to the high productivity urban sector, appears to fit Lewis’

model of dualistic development. More recently, the concept of the Lewisian turning point has gained

widespread traction in discussions of China’s future growth prospects, prompted by reports of worker

shortages in the major industrial areas.

Proponents of the Lewisian turning point have pointed out that the current labour shortage arises from a

decline in the working-age population. They argue that China is reaching the turning point as a result of its

demographic transition from a largely rural society to a predominantly urban population. In the early stages

of the transition, when mortality rates start to fall before fertility rates do so, the economy will benefit from

the demographic dividend as the GDP growth rate rises due to the growing proportion of working-age

people in the population. Eventually, however, fertility rates decline, the population begins to age, and the

Lewisian turning point kicks in when surplus labour is exhausted.

Apart from the demographic transition, Cai (2008) observed that China has experienced a further fall in the

natural population growth rate since the Cultural Revolution in the 1960s, which caused a dip in the growth

rate of the working-age population twenty years later. This was aggravated by the one-child policy

introduced in 1978. The United Nations estimates that the proportion of the working-age group in China’s

total population started to fall after 2010, and that the size of the cohort will begin to contract by around

2015. In contrast, Cai (2008) reckoned that China had reached its Lewisian turning point as early as 2004,

and that labour shortages would be widespread by 2009.

The findings of nation-wide surveys also support the view that China has run out of surplus rural labour.

For example, a 2005 survey conducted by the China Development Research Centre of the State Council

indicated that, although the rural surplus was about 100 million, many of these workers were middle-aged

and unsuited for relocation to the industrial sector. About three-quarters of the villages spread across

17 provinces responded that “all the young workers in the village that are capable of working away from

home have already left”.

Other studies have noted that the shortage of migrant workers is pervasive across China, and not merely

confined to the eastern coastal regions. According to the 2009 Peasant Workers Monitoring Survey by the

National Bureau of Statistics, the number of migrant workers in the Pearl River Delta fell by 22.5% y-o-y,

while it grew by 33.2% in the Central region and 35.8% in the Western region. Since then, economic growth

has soared in the latter areas, thus pushing China nearer to full employment and the Lewisian turning point.

According to data from the China Household Income Project (CHIP), nominal migrant wages rose by more

than 9% p.a. from 2006 to 2009.



Evidence Against the Lewisian Turning Point

Sceptics have disputed the claim that China has exhausted its pool of surplus rural labour because soaring

wages could be attributed to an apparent shortage of migrant labour in the cities which was caused by

policy barriers rather than demographic factors. They cite empirical studies that show that there is still an

abundant supply of labour in the rural regions. For instance, the World Bank asserted that a tightening of

the Chinese labour market was not imminent, based on estimates of annual labour entrants of 8 million and

24 million in rural and urban areas respectively. Knight et al. (2011) also found that there are 80 million

rural people who are potential migrant workers, while Mai and Peng (2009) deduced that the pool of rural

surplus labour will expand as agricultural labour productivity continues to grow.

Leveraging on a survey undertaken by the Rural-Urban Migration in China and Indonesia project (RUMiCI),

Golley and Meng (2011) concluded that there still is an abundance of rural workers who are

under-employed with low income, and that rural-urban migration would remain a major source of economic

growth for China. As compared to studies which downplay the distortions caused by the hukou (registration)

policy, Golley and Meng (2011) conclude that the policy is a formidable deterrent to the migration of

workers from the countryside to the cities.

If the Lewisian turning point has indeed arrived, the gap between the wages of rural unskilled and urban

skilled workers would have narrowed. Yet, Golley and Meng (2011) find that the wages of urban skilled

workers have soared by over 90% from 2000 to 2009, while those of migrant workers only increased by 30%.

They therefore surmised that urban-rural wage differentials were not converging precisely because of

regulatory barriers that prevent the free mobility of labour in China.

Conclusion

Although the empirical evidence on the Lewisian turning point is mixed and does not lend overwhelming

support to either camp, the truth is likely to be somewhere in between. Rising wages in China could be

attributed to a confluence of factors—depletion of surplus rural labour in some regions, labour immobility due

to policy barriers, and increased productivity of labour. Nonetheless, Lewis’ hypothesis remains useful in

predicting the future interactions between wage differentials, labour supply, and rural-urban migration in China.

As China’s urban population surpassed that of the rural areas for the first time at the end of 2011,

the Lewisian hypothesis suggests that wage hikes are likely to accelerate further, and that the need to

review policies which can sustain China’s economic growth assumes greater importance. The policy options

to increase labour supply in China include raising the retirement age, reforming the hukou system to grant

citizens equal access to social amenities such as schooling, healthcare, and housing, and increasing

investment in education and training to boost productivity.

References

Cai, F (2008), “Approaching A Triumphal Span: How Far is China Towards its Lewisian Turning Point?”,

UNU-WIDER, Research Paper No. 2008/09.

Golley, J and Meng, X (2011), “Has China Run Out of Surplus Labour?”, China Economic Review, Vol. 22(4),

pp. 585–600.

Knight, J, Deng, Q and Li, S (2011), “The Puzzle of Migrant Labour Shortage and Rural Labour Surplus in

China”, China Economic Review, Vol. 22(4), pp. 555–572.

Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School of

Economic and Social Studies, Vol. 22(2), pp. 139–191.

Mai, Y and Peng, X (2009), “Estimating the Size of Rural Labour Surplus in China—A Dynamic General

Equilibrium Analysis”, Centre of Policy Studies Working Paper No. G-189.

Special Features 73


The Pass-through from Wages to Export Prices:

Empirical Evidence

Results for Hong Kong

According to augmented Dickey-Fuller tests,

the null hypothesis of a unit root cannot be

rejected at the 5% level of significance for the

logarithmic values of all the variables used in the

empirical analysis for Hong Kong.5 The Johansen

test further shows that the non-stationary

variables in equation (1) are cointegrated and that

there is a single cointegrating vector binding the

time series together in the long run.6

This vector, estimated via maximum likelihood

(ML) and normalised on Hong Kong’s import

prices, is shown in column (1) of Table 1 for a

model with four lags.7 Only the coefficient on ULC

is statistically significant and its estimated

magnitude suggests that a 1.0% increase in

China’s ULC will raise Hong Kong’s import prices

by 0.5% in the long run. For comparison,

the long-run parameters in the cointegrating

equation are also estimated using single equation

OLS and these are shown in column (2).8

For every 1.0% increase in China’s unit labour

costs, Hong Kong’s import prices rise by only 0.3%

in this regression. Raw material costs have

a similar, albeit stronger, impact on prices.

In contrast, the exchange rate effect is much

larger and also significant, although pass-through

is far from being complete in the long run.

Table 1

Regression Estimates for Hong Kong Import Prices, Q1 2000 to Q3 2011

Dependent Variable: ln(Pt)

Explanatory

Variable

(1) (2) (3)

ML OLS DOLS

ln(ULCt) 0.51** 0.32** 0.47*

(0.13) (0.10) (0.17)

ln(MATt) 0.05 0.37* 0.68**

(0.24) (0.14) (0.22)

ln(EXCHt) 0.14 0.57** 0.43**

(0.09) (0.07) (0.08)

Constant 2.08 1.44 −0.63

(0.88) (1.70)

Diagnostics

R-squared 0.76 0.93 0 .97

No. of observations 43 47 44

Standard error of regression 0.01 0.02 0.02

Durbin-Watson statistic - 0.48 0.63

Note: Heteroskedasticity and autocorrelation-consistent standard errors are in parentheses.



5 For lag lengths of up to four, and regardless of whether a trend term is included in the test.

6 Although the number of cointegrating vectors found is sensitive to the lag length, when the producer mark-up was

excluded from the analysis, the rank test consistently indicated that there is only a single cointegrating vector.

7 Variations in profit margins have statistically insignificant effects and the variable has been omitted in the specifications in

Table 1.

8 Note that the reported t-statistics are only indicative of true statistical significance, since the asymptotic distribution of

the estimated parameters is, in general, not normal.



In practice, the OLS estimates of the cointegration

parameters, though super-consistent, may be

subject to small sample biases. Consequently,

the method of dynamic OLS (DOLS) proposed by

Stock and Watson (1993) was applied to check on

their robustness. Augmenting the OLS regression

with the contemporaneous, forward and lagged

changes in each regressor resulted in somewhat

larger elasticities for ULC and MAT and a smaller

coefficient for EXCH. Hence, the results are

relatively robust to the estimation method used

and they suggest unequivocally that rising unit

labour costs in China have had at least a modest

impact on Hong Kong’s import prices in the last

decade.

Even so, Chart 1 suggests that China’s unit labour

costs and Hong Kong’s import prices have only

risen in tandem from the beginning of 2005,

thus raising the possibility of time-varying

behaviour in the parameter estimates. Chart 2

plots the recursive DOLS estimates of the unit

labour cost elasticity, with the initial sub-sample

being Q1 2000–Q4 2004. The recursive elasticity

is seen to be relatively low and statistically

indistinguishable from zero in the years preceding

the Global Financial Crisis, turned negative during

the crisis period, and then rose rapidly in 2010

before stabilising at 0.47 in 2011.

To complete the analysis, a short-run error

correction model is estimated, based on the DOLS

estimates of the long-run parameters given in

Table 1. Following a general-to-specific approach

to lag length reduction, the final result is as

follows9

(figures in parentheses are standard

errors):

1(0.13) (0.16)

1(0.05)

ln( ) 0.46 ln( ) 0.39 ln( )

0.09

t t t

t

P P EXCH

ECM

−

−

∆ = ∆ + ∆

− (2)

2

0.40 S.E. = 0.01 DW 2.01R = =

The explanatory power of this equation is

reasonable while the standard error of the

regression is less than 1%. The “loading”

coefficient on the error-correction term (ECMt−1)

is marginally significant but its estimated size

suggests that import prices adjust tepidly to

changes in their long-run determinants. Instead,

import price movements tend to be fairly

persistent, as indicated by the relatively large

coefficient on the lagged dependent variable.

In the short run, the only variable that affects

prices is exchange rate fluctuations, with almost

all the pass-through taking place immediately.

9 The estimated constant is too small to be reported.

Chart 2

Recursive DOLS Estimates of the ULC Coefficient

for Hong Kong

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

-0.4

Es

tim

ate

d C

oe

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t V

alu

e


2011 Q32006 2007 2008 2009 20102004Q4

Special Features 75


Results for Singapore

Unit root and cointegration tests suggest

that Singapore’s import prices are integrated,

and cointegrated with the set of explanatory

variables. Nevertheless, preliminary findings

show that the producer mark-up plays a more

important role in explaining Singapore’s import

price movements than raw material prices.

Omitting the material costs variable, the unique

cointegration vector estimated by a multivariate

model with four lags is shown in column (1) of

Table 2. The coefficient on China’s unit labour

costs is highly significant, but it implies a long-run

impact on Singapore’s import prices that is

implausibly large compared to Hong Kong.

In contrast, the effect of profit margins appears

to be reasonable while the exchange rate

pass-through is statistically insignificant and of an

incorrect sign.

However, the results reported in the remaining

columns put the ML estimate into perspective:

the elasticity of Singapore’s import prices with

respect to China’s unit labour costs falls to 0.8

using OLS, though the variable remains highly

significant.

The other coefficients are statistically

insignificant—dropping them from the regression

raises the estimated elasticity of labour costs

somewhat, but otherwise leaves the results

unchanged.

Again, the DOLS results appear to be the

most intuitive and amenable to economic

interpretation. In column (3) of Table 2, the

dynamic regression estimates suggest that the

elasticity of China’s unit labour costs is close to

unity, higher than the static OLS results.

The impact of corporate profits, with a coefficient

of 0.4, is also significant and relatively strong.

Furthermore, the DOLS method implies that there

is some exchange rate pass-through into

Singapore’s import prices, even though the

estimated coefficient is not significant at the

conventional levels.

Table 2

Regression Estimates for Singapore Import Prices, Q1 2000 to Q3 2011

Dependent Variable: ln(Pt)

Explanatory

Variable

(1) (2) (3)

ML OLS DOLS

ln(ULCt) 1.68** 0.76** 0.98**

(0.28) (0.17) (0.21)

ln(PROFITt) 0.48* 0.12 0.40*

(0.21) (0.08) (0.17)

ln(EXCHt) −1.10 −0.17 0.28

(0.88) (0.43) (0.70)

Constant 5.50 0.76 0.02

(0.83) (1.44)

Diagnostics

R-squared 0.50 0.32 0.61

No. of observations 43 47 44

Standard error of regression 0.07 0.09 0.07

Durbin-Watson statistic - 1.26 1.36

Note: Heteroskedasticity and autocorrelation-consistent standard errors are in parentheses.





Recursive estimates of the ULC elasticity from the

DOLS regression, plotted in Chart 3, show that the

impact of rising unit labour costs in China on

Singapore’s import price inflation has been

consistently positive and significant since 2007.

The coefficient hovered around 2.0 in the

immediate pre-financial crisis period but then fell

to 0.98 in mid-2011, where it has stabilised.

Recursive estimates for the other coefficients also

reveal parameter stability towards the end of the

sample period, thus allowing the results to be

used for valid inference about the likely future

effect of wage inflation in China on Singapore’s

import prices. Given this, the final estimated

elasticities are used to form the following

error-correction model for Singapore:

1(0.11) (0.12)

ln( ) 0.19 ln( ) 0.43t t tP PROFIT ECM −∆ = − ∆ − (3)

2

0.45 S.E. = 0.07 DW 2.14R = =

As with the case of Hong Kong, this is a very

simple and parsimonious model for capturing

short-run fluctuations in the prices of Singapore’s

imports from China. Price adjustments essentially

obey an error correction mechanism, with profit

margins having only a small and relatively

insignificant effect. Compared with Hong Kong,

however, the speed of adjustment to the long-run

equilibrium is much faster—slightly over

two-fifths of the current disequilibrium is

eliminated every quarter—thus confirming that

the level of Singapore’s import prices co-moves

with Chinese unit labour costs and profit

mark-ups over the longer term.

Sum-up

This Special Feature has undertaken an

econometric analysis of the extent to which unit

labour cost changes in China are reflected in the

import prices of two of its major trading partners,

Hong Kong and Singapore, after taking into

account raw material cost movements, variations

in profit margins, and exchange rate effects.

In general, the results suggest that the recent

wage cost inflation in China has had a statistically

discernable impact on both Hong Kong and

Singapore’s import prices. The estimated

elasticities range from 0.3–1.0 and are generally

higher for Singapore.

Chart 3

Recursive DOLS Estimates of the ULC Coefficient

for Singapore

-6

-4

-2

0

2

4

6

8

Es

tim

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d C

oe

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ien

t V

alu

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2011 Q32006 2007 2008 2009 20102005Q3

Special Features 77


While material costs also matter for the

determination of Hong Kong’s prices, the

producer mark-up has a more important role to

play in Singapore’s case.

The implication for global inflation is that if

China’s unit labour costs continue to rise with the

arrival of the Lewisian turning point, countries

importing from China will face higher prices,

in the absence of appropriate policy measures or

exchange rate appreciation.

References

Feyzioglu, T and Willard, L (2006), “Does Inflation in China Affect the United States and Japan?”,

IMF Working Paper No. WP/06/36.

Goldberg, P K and Knetter, M M (1997), “Goods Prices and Exchange Rates: What Have We Learned?”,

Journal of Economic Literature, Vol. 35(3), pp. 1243–1272.

IMF (2011), “How Large Are Chinese Inflation Spillovers to the Region?”, Regional Economic Outlook, Asia

and Pacific, October, pp. 7.

Kamin, S B, Marazzi, M and Schindler, J W (2006), “The Impact of Chinese Exports on Global Import Prices”,

Review of International Economics, Vol. 14(2), pp. 179–201.

Kravis, I B and Lipsey, R E (1977), “Export Prices and the Transmission of Inflation”, American Economic

Review, Vol. 67(1), pp. 155–163.

Mallick, S K and Marques, H (2008) “Exchange Rate Transmission into Industry-Level Export Prices: A Tale

of Two Political Regimes in India”, IMF Staff Papers, Vol. 55(1), pp. 83–108

OECD (2006), “Globalisation and Inflation in the OECD Economies”, Working Paper No. 1 on

Macroeconomic and Structural Policy Analysis, ECO/CPE/WP1 (14).

Stock, J and Watson, M (1993), “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated

Systems”, Econometrica, Vol. 61(4), pp. 783–820.



Product Price Targeting—A New

Improved Way of Inflation Targeting by Jeffrey Frankel1

Introduction

Many countries have experienced highly variable

terms of trade in recent years, as a result of

unusually high volatility in world prices of oil,

minerals, and agricultural products. Exporters of

these commodities enjoyed sharp improvements

in their terms of trade in the years up to 2008,

and again in 2010–11, and a sharp deterioration

in 2009. There is risk of another decline in the

future. For importers of oil, food, or other raw

materials, of course, the pattern is precisely the

reverse.

Terms of trade volatility poses a serious challenge

to the inflation targeting (IT) approach to

monetary policy. IT had been the favoured

monetary regime in many quarters. But the

shocks of the last five years have shown some

serious limitations to IT, much as the currency

crises of the late 1990s showed some serious

limitations to exchange rate targeting.

There are many variations of IT: focusing on

headline versus core CPI, price level versus

inflation, forecasted inflation versus actual,

and so forth. Some interpretations of IT are

flexible enough to include output in the target at

relatively short horizons. But all orthodox

interpretations focus on the CPI as the choice of

price index. This choice may need rethinking in

light of heightened volatility in prices of

commodities and, therefore, in the terms of trade

in many countries.

A CPI target can lead to anomalous outcomes in

response to terms of trade fluctuations. Textbook

theory says it is helpful for exchange rates to

accommodate terms-of-trade shocks. If the price

of imported oil rises in world markets, a CPI target

induces the monetary authority to tighten money

enough to appreciate the currency—the wrong

direction for accommodating an adverse

movement in the terms of trade. If the price of

the export commodity rises in world markets,

a CPI target prevents monetary tightening

consistent with appreciation as called for in

response to an improvement in the terms of

trade. In other words, the CPI target gets it

exactly backward.

An alternative is to use a price index that reflects

a basket of goods that the country in question

produces, including those exported, in place of an

index that reflects the basket of goods consumed,

including those imported. It could be an index of

export prices alone or a broader index of all goods

produced domestically. I call the proposal to use

a broad output-based price index as the anchor

for monetary policy Product Price Targeting (PPT).

1 Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at the Harvard Kennedy School. He visited

EPG, MAS in March 2011 under MAS’ Eminent Visitor Programme. The views in this Special Feature are solely those of the

author and should not be attributed to MAS.

Special Feature B

Special Features 79


Why Target an Output-based Price Index?

Many small open countries still pursue an

exchange rate target. The argument for targeting

an output-based price index if the alternative is

an exchange-rate target can be stated succinctly.

It delivers one of the main advantages that a

simple exchange-rate peg promises, namely a

nominal anchor, while simultaneously delivering

one of the main advantages that a floating regime

promises, namely automatic adjustment in the

face of fluctuations in world prices of the

countries’ exports.

Why not simply float? Even if a country decides

to float, as so many did after the currency crises

of the late 1990s, it still needs some sort of

anchor for monetary policy. This reasoning is

what led to the popularity of inflation targeting in

the first place. But what should the price index

be?

The argument for targeting any of the

output-based price indexes is that it is robust

with respect to terms-of-trade shocks. If the

terms-of-trade shock is a fall in the export price,

these output-based indices allow the currency

to depreciate, a desirable property unavailable

to CPI-targeting. If, on the other hand,

the terms-of-trade shock is a rise in the price of

imported oil for example, CPI-targeting says to

tighten monetary policy enough to raise the

currency, an undesirable property that is not held

by output-based targeting. Some central bankers

say they avoid the problem of import price shocks

by targeting core CPI, excluding energy and farm

products, either as an explicit ex ante policy or by

explaining away such import price increases

ex post. But CPI-targeters such as Brazil, Chile,

and Peru are observed in fact to respond to

increases in world prices of imported oil with

monetary policy that is sufficiently tight to

appreciate their currencies. This is an undesirable

property, the opposite of accommodating the

terms of trade.

Export Price Targeting

At one time, I proposed tying the currency to a

single export commodity (Frankel, 2003).

The plan was to fix the price of that commodity in

terms of domestic currency. For example, Zambia

would peg its currency to copper—in effect

adopting a metallic standard. Jamaica would peg

to alumina. The UAE would peg to oil.2 And so

forth. I called it PEP, for Peg the Export Price.3

Some responded to this proposal by pointing out,

correctly, that the side effect of stabilising the

local-currency price of the export commodity in

question is that it would destabilise the

local-currency price of other export goods.

It could in effect hard-wire the Dutch Disease:

when the leading export booms, the currency

automatically appreciates, and all other exports

lose competitiveness. The scenario could be

extreme: a doubling in the dollar price of oil

would double the dollar value of the local

currency. Land, labour and capital move out of

the export manufacturing sector, for example,

and into non-traded goods (along with the

booming commodity sector). If agricultural or

mineral commodities constitute virtually all of

exports, then this may not be a big issue. But for

most countries, no single commodity constitutes

more than half of exports. Moreover, even those

that are heavily specialised in a single mineral or

agricultural product may wish to encourage

diversification further into new products in the

future, so as to be less dependent on that single

commodity. Imposing extra volatility on them

seems inconsistent with this goal.

2 Or perhaps to a basket of oil, dollars, and euros (Frankel, 2008).

3 Operationally, the central bank each day could announce an exchange rate vis-à-vis the dollar, following the rule that the

day’s exchange-rate target (dollars per local currency unit) moves precisely in proportion to the day’s price of gold or

copper or oil on the New York market (dollars per commodity). The central bank can then intervene via the foreign

exchange market to achieve the day’s target.



One way to moderate the proposal is to interpret

it not as targeting the price of a single export

commodity, but rather as targeting a broad

index of all export prices: Peg the Export Price

Index. (Frankel, 2005) Even under this version,

however, a general boom in export goods

would likely cause a big appreciation and a loss

in competitiveness for the import-competing

sector. Factors of production still move into the

non-traded goods sector.

Product Price Targeting is a way to moderate the

proposal still further. PPT targets a broad index

of all domestically produced goods whether they

are exportable or not. The GDP deflator is one

possible output-based price index, but has the

disadvantage of only being available quarterly,

and being subject to lags in collection,

measurement errors, and subsequent revisions.

It may be necessary to construct a new monthly

index. Even in a small poor country with limited

capacity to gather statistics, government workers

can survey a sample of firms every month to

construct a Product Price Index.

Comparing Competing Monetary Targets

In a recent paper (Frankel, 2011), I examine a

set of countries in Latin America and the

Caribbean and compare the paths of prices under

the historical monetary regime with what

would have happened under five other possible

regimes, i.e. dollar target, euro target, SDR target,

CPI target, and my output-based price targets.

First, the simulations suggest that the currency

anchors offer far more price stability than the

historical reality. Second, export-price pegging

perfectly stabilises the domestic price of export

commodities, by construction. Third, the more

striking finding is that product-price targeting

generally delivers more stability in the real prices

of traded goods, especially the export commodity.

This is a natural consequence of the larger weight

on commodity exports, as compared to the CPI.

Implementation Issues

If a broad index of export or product prices was to

be the nominal target, it would of course be

impossible in practice for the central bank to hit

the target exactly. There would instead be a

declared band for the price index target, which

could be wide if desired, just as with the targeting

of the CPI, money supply, or other nominal

variables. Open market operations to keep the

export price index inside the band if it threatens

to stray outside could be conducted either in

terms of foreign exchange or in terms of domestic

securities.

For some countries, it might help to monitor on a

daily or weekly basis the price of a basket of

agricultural and mineral commodities that is as

highly correlated as possible with the country’s

overall price index, but whose components

are observable on a daily or weekly basis in

well-organised markets. Much of the variation in

South Africa’s overall export or product prices,

for example, arises in four commodities: gold,

platinum, iron, and coal. Jamaica’s price index is

dominated by five commodities: alumina,

bananas, coffee, rum and sugar. In each case,

if a short-term price index is to be a bridge to

annual targeting of an economy-wide Product

Price Index then it should probably give a

big weight to housing alongside the export

commodities. Including housing would serve

several purposes: it would give representation to

the important non-traded goods component of

production, would raise the correlation of the

short-term index with the economy-wide index,

and would help keep a lid on incipient

asset-market bubbles—which have done more to

show the limitations of traditional IT than

anything else.

Special Features 81


Sum-up: Who Should Consider PPT?

The PPT proposal is not for everybody. It is

designed for countries where exogenous terms of

trade volatility are a source of macroeconomic

instability. The most obvious candidates are

countries that specialise in the exports of the

most volatile commodities, including oil and gas,

copper, and coffee. Countries with the highest

terms of trade variability tend to be concentrated

among oil exporters and Latin Americans.

Topping the list are Libya, Dominican Republic,

Chile, Venezuela, Iran, Nigeria, and Honduras.

The terms of trade of some commodity exporters

may not be as variable as one might expect, if the

world prices of their export commodities happen

to be correlated with the world prices of their

import commodities. Examples appear to include

Colombia, Kazakhstan, and Sri Lanka: although

their dollar export prices vary as much as those of

oil exporters like Nigeria, the dollar prices of their

import commodities tend to move in tandem,

so that their overall terms of trade variability

ranks relatively low.

Theoretical models of IT typically miss the issue of

terms of trade vulnerability, either because they

are not designed for open economies or because

they rely on well-functioning international capital

flows that effortlessly finance temporary trade

shocks. But a model that ignores the tendency for

international finance to disappear in times of

trouble is not very useful for choosing an

exchange rate regime.

For a country concerned about terms of trade

volatility but not ready to take the plunge of

committing to PPT, riskless exploratory steps are

at hand. The first step would be for the central

bank to collect and publish the statistics for a

suitable price index on a monthly basis. This need

not be any more difficult than collecting the

statistics for the CPI. Indeed, it can be less

difficult if capacity is lacking: statisticians need

only survey a limited number of commodities.

The second step would be for the monetary

authorities to announce that they are monitoring

the Product Price Index, as one of a number of

indicators of the appropriate stance of monetary

policy. The third step, for a central bank that is

ready to adopt PPT, would be to announce a

target range for the Product Price Index.

References

Frankel, J (2003), “A Proposed Monetary Regime for Small Commodity-Exporters: Peg the Export Price

(‘PEP’)”, International Finance, Vol. 6(1), pp. 61–88.

Frankel, J (2005), “Peg the Export Price Index: A Proposed Monetary Regime for Small Countries”, Journal

of Policy Modeling, Vol. 27(4), pp. 495–508.

Frankel, J (2008), “UAE and Other Gulf Countries Urged to Switch Currency Peg from the Dollar to a Basket

that Includes Oil”, (URL http://www.voxeu.org/index.php?q=node/1381).

Frankel, J (2011), “A Comparison of Monetary Anchor Options, Including Product Price Targeting, for

Commodity-Exporters in Latin America”, Economía, Vol. 12(1), pp. 1–57.



Statistical Appendix Table 1: Real GDP Growth by Sector

Table 2: Real GDP Growth by Expenditure

Table 3: Labour Market (I)

Table 4: Labour Market (II)

Table 5: External Trade

Table 6: Non-oil Domestic Exports by Selected Countries

Table 7: Electronics Leading Index

Table 8: Consumer Price Index

Table 9: MAS Core Inflation

Table 10: Balance of Payments – Current Account

Table 11: Balance of Payments – Capital & Financial Accounts

Table 12: Exchange Rates

Table 13: Singapore Dollar Nominal Effective Exchange Rate Index

Table 14: Domestic Liquidity Indicator

Table 15: Monetary

Table 16: Fiscal

83


TABLE 1: REAL GDP GROWTH by Sector

Period Total

Manu-

facturing

Finance

& Insur-

ance

Business

Services

Const-

ruction

Wholesale

& Retail

Trade

Accom &

Food

Services

Transpor-

tation &

Storage

Info &

Comms Total

Manu-

facturing

Finance

& Insur-

ance

Business

Services

Const-

ruction

Wholesale

& Retail

Trade

Accom &

Food

Services

Transpor-

tation &

Storage

Info &

Comms

Year-on-Year % Change Seasonally-adjusted Quarter-on-Quarter Annualised % Change

2010 14.8 29.7 12.4 6.2 3.9 15.1 12.2 7.9 3.4

2011 4.9 7.6 9.1 2.7 2.6 1.1 5.8 4.7 1.5

2010 Q1 16.5 37.2 17.8 6.3 6.6 17.1 11.2 8.1 3.6 36.4 160.1 9.7 7.4 -19.9 33.2 17.2 4.0 3.4

Q2 19.8 45.2 10.6 7.6 9.4 19.0 15.6 9.7 3.7 31.3 84.2 13.0 6.3 27.7 15.1 16.1 4.4 4.3

Q3 10.6 13.7 8.9 6.4 3.8 14.2 11.7 8.0 3.5 -15.9 -49.0 0.4 3.0 -11.3 -1.1 1.3 6.6 3.7

Q4 12.5 25.7 12.6 4.7 -3.1 10.7 10.3 5.8 2.8 6.9 4.4 29.4 2.4 -3.1 -0.1 8.4 8.3 -0.2

2011 Q1 9.1 15.8 12.0 4.7 4.2 4.3 8.8 4.0 2.6 19.7 80.7 7.3 6.6 8.8 3.6 9.6 -3.0 2.7

Q2 1.2 -5.9 9.6 2.3 1.1 0.9 5.7 7.3 1.7 -3.0 -19.5 3.7 -2.4 9.5 0.5 3.3 18.0 0.9

Q3 6.0 13.7 11.6 1.9 2.4 -1.4 5.6 5.1 0.9 2.0 11.0 7.8 1.5 -4.0 -8.9 1.5 -1.2 -0.2

Q4 3.6 9.2 3.5 1.9 2.9 0.9 3.3 2.4 0.7 -2.5 -11.1 -4.4 2.4 -2.2 10.2 -0.6 -2.9 -0.2

Source: Singapore Department of Statistics

TABLE 2: REAL GDP GROWTH by Expenditure Year-on-Year % Change

Period Total

Demand

Domestic Demand Exports of Goods

& Services

Imports of Goods

& Services Total Consumption Gross Fixed Capital Formation

Total Private Public Total Private Public

2010 16.1 6.9 7.4 6.5 11.0 7.0 5.5 15.4 19.1 16.2

2011 3.2 5.4 3.4 4.1 0.9 3.3 1.8 11.4 2.6 2.4

2010 Q1 18.6 11.2 9.7 8.6 12.7 10.1 8.3 19.9 21.2 17.5

Q2 21.0 10.7 6.6 7.3 3.1 2.2 -0.1 18.3 24.5 21.7

Q3 14.3 -0.2 4.7 3.4 9.7 10.3 9.2 16.4 19.0 15.7

Q4 11.2 6.4 8.6 6.7 15.8 5.8 5.4 7.8 12.6 10.5

2011 Q1 6.9 3.4 3.5 3.4 4.0 -3.4 -7.6 16.4 8.1 5.9

Q2 1.9 4.9 5.4 5.5 4.7 8.6 8.1 11.7 1.1 2.5

Q3 2.5 8.5 4.9 5.9 1.3 8.0 7.3 11.8 0.8 0.7

Q4 1.8 4.9 0.2 1.9 -5.8 -0.2 -1.3 5.4 0.9 1.0


84


TABLE 3: LABOUR MARKET (I) Year-on-Year % Change

Period

Average

Monthly

Earnings

Labour Productivity Unit Labour Cost

Total Manufacturing Construction Wholesale &

Retail Trade

Accom & Food

Services

Transportation

& Storage

Information &

Communications

Finance &

Insurance

Business

Services

Overall

Economy Manufacturing

2010 5.6 11.1 32.2 0.5 12.2 7.1 6.5 -2.8 6.4 0.4 -2.2 -15.8

2011 6.0 1.0 7.7 -0.2 -2.4 -0.1 1.1 -8.5 1.5 -2.7 3.4 -2.5

2010 Q1 3.7 14.3 45.3 1.0 15.0 8.3 8.8 -0.3 14.5 1.7 -7.7 -23.4

Q2 5.8 16.0 48.2 5.2 16.0 10.8 8.6 -1.6 5.3 1.9 -6.5 -24.5

Q3 5.4 6.4 13.8 1.1 10.9 5.9 5.8 -3.4 2.0 0.0 3.2 -0.5

Q4 7.5 8.2 25.5 -4.3 7.2 3.7 3.0 -5.7 4.7 -1.8 3.0 -10.7

2011 Q1 8.5 5.2 16.5 3.2 0.7 2.3 0.7 -7.6 3.7 -1.2 2.7 -7.9

Q2 6.0 -2.3 -5.4 -1.0 -2.5 0.0 3.5 -8.8 1.8 -3.3 8.2 13.9

Q3 5.4 2.0 13.4 -0.8 -5.0 -0.2 1.1 -9.7 3.9 -3.2 1.6 -7.7

Q4 4.0 -0.4 8.7 -2.2 -2.7 -2.3 -0.9 -8.0 -3.0 -3.1 1.7 -4.6

Note: Labour productivity figures are based on SSIC 2010 classification. Source: Singapore Department of Statistics/Central Provident Fund Board

TABLE 4: LABOUR MARKET (II) Thousand

Period

Changes in Employment

Total Manufacturing Construction Wholesale &

Retail Trade

Accom & Food

Services

Transportation

& Storage

Information &

Communications

Finance &

Insurance

Business

Services Other Services Others

2010 115.9 -0.8 3.4 14.5 12.7 6.2 8.8 11.4 25.0 34.0 0.7

2011 122.6 3.4 22.0 15.9 9.2 6.7 8.0 10.9 21.0 23.8 1.1

2010 Q1 36.5 3.0 0.0 2.8 0.9 1.0 1.6 2.6 8.1 16.7 -0.2

Q2 24.9 -1.4 1.7 1.7 1.0 1.9 2.2 3.0 7.2 7.7 0.1

Q3 20.5 0.2 0.3 1.8 2.3 1.5 2.3 4.1 6.1 1.5 0.3

Q4 33.9 -2.5 1.4 8.2 8.5 1.8 2.7 1.6 3.6 8.1 0.5

2011 Q1 28.3 0.5 2.3 3.1 -0.3 1.3 2.6 3.3 6.6 8.9 0.1

Q2 24.8 0.5 4.6 2.1 0.2 2.7 2.8 2.6 6.6 2.3 0.4

Q3 31.9 3.9 6.7 2.9 3.1 1.6 2.0 3.0 3.5 5.1 0.2

Q4 37.6 -1.4 8.4 7.9 6.2 1.2 0.7 2.1 4.3 7.6 0.4

Note: Changes in employment numbers are based on SSIC 2010 classification. Source: Ministry of Manpower

85


TABLE 5: EXTERNAL TRADE Year-on-Year % Change

Period

Total

Trade Exports

Domestic Exports

Re-

exports

Imports Exports

Domestic Exports

Re-

exports Imports

Total

Oil

Non-oil

Total

Oil

Non-oil Total Electronics

Non-

electronics

At Current Prices At 2006 Prices

2010 20.7 22.4 24.3 27.9 22.8 25.6 21.2 20.5 18.8 21.2 20.1 6.5 25.6 22.2 16.2

2011 8.0 7.5 13.2 38.6 2.2 -13.1 11.4 1.4 8.6 2.8 5.8 8.2 5.0 -0.3 1.3

2010 Q1 26.9 28.2 31.9 56.9 23.1 29.8 19.4 24.5 25.5 22.2 19.7 6.1 25.6 24.8 15.5

Q2 27.8 29.1 33.4 48.0 27.6 34.2 23.9 24.6 26.4 25.6 25.3 15.6 29.2 25.9 21.8

Q3 17.9 20.0 19.2 9.2 23.7 27.1 21.8 20.9 15.6 21.8 19.7 2.0 26.9 24.0 17.5

Q4 12.2 14.5 15.8 11.8 17.6 14.2 19.6 13.0 9.7 15.8 16.3 3.1 21.2 15.2 10.4

2011 Q1 11.9 13.4 19.4 35.2 12.3 -7.2 24.2 7.2 10.2 10.4 14.9 10.9 16.4 5.9 3.9

Q2 7.5 6.7 10.5 29.1 1.9 -14.4 11.6 2.6 8.4 2.4 4.0 -0.7 5.7 0.8 1.4

Q3 5.4 4.7 14.5 53.8 -1.2 -16.7 8.2 -5.7 6.2 0.2 6.3 16.0 3.2 -6.1 -1.0

Q4 7.7 5.8 9.0 36.9 -2.7 -13.5 3.6 2.2 9.9 -0.7 -0.7 7.1 -3.1 -0.8 1.0

2012 Q1 7.5 4.8 10.1 17.4 6.1 14.7 2.2 -1.3 10.4 2.6 6.1 2.4 7.3 -1.2 6.8

Source: International Enterprise Singapore

TABLE 6: NON-OIL DOMESTIC EXPORTS by Selected Countries

Period

All

Countries

ASEAN NIEs

China EU Japan US Total

of which Total Hong Kong Korea Taiwan

Indonesia Malaysia Thailand

Year-on-Year % Change

2010 22.8 19.2 22.4 19.1 21.0 39.1 36.4 35.9 47.0 31.4 30.8 25.1 24.7

2011 2.2 2.3 -1.2 0.1 0.7 -6.4 -11.5 -2.7 -0.6 7.1 0.2 1.9 -11.6

2010 Q1 23.1 41.5 54.1 28.8 42.9 64.8 52.6 57.6 99.3 25.3 4.7 28.3 11.2

Q2 27.6 26.1 22.9 26.4 28.3 45.0 42.0 47.8 47.7 42.8 30.4 47.8 23.0

Q3 23.7 9.8 8.0 17.6 11.3 37.2 33.6 38.2 42.9 30.7 52.6 17.2 34.8

Q4 17.6 6.2 11.7 7.0 7.6 19.8 23.9 10.3 20.6 27.6 35.4 11.4 27.9

2011 Q1 12.3 0.0 -5.9 6.0 -1.1 -3.7 -5.2 -9.8 4.1 12.6 19.7 0.7 14.0

Q2 1.9 1.6 2.2 -1.5 3.0 -6.2 -18.8 0.6 8.5 7.1 8.5 -7.6 -2.4

Q3 -1.2 5.3 1.1 -5.6 8.6 -11.0 -10.8 -8.6 -13.2 9.7 -5.4 3.9 -22.4

Q4 -2.7 2.1 -1.8 2.4 -7.5 -4.2 -11.3 7.5 -0.3 0.3 -15.0 11.7 -26.7

2012 Q1 6.1 7.9 4.1 -0.6 30.2 18.0 19.1 37.0 2.4 3.8 0.5 9.1 12.2

% Share of All Countries

2010 100.0 22.5 6.4 8.4 4.1 19.7 9.5 4.6 5.5 11.1 15.5 6.1 11.0

2011 100.0 22.6 6.2 8.2 4.0 18.0 8.3 4.4 5.4 11.6 15.2 6.1 9.5

Source: International Enterprise Singapore

86


TABLE 7: ELECTRONICS LEADING INDEX

Original Smoothed

Period 1999 = 100 Year-on-Year % Change Quarter-on-Quarter

% Change 1999 = 100 Year-on-Year % Change

Quarter-on-Quarter

% Change

2010 63.4 2.5 63.7 3.0

2011 57.4 -9.5 57.8 -9.3

2010 Q1 64.0 8.2 -0.1 63.9 5.4 0.1

Q2 64.9 7.3 1.4 64.8 7.8 1.4

Q3 64.3 0.8 -1.0 64.4 2.4 -0.6

Q4 60.4 -5.8 -6.0 61.7 -3.4 -4.1

2011 Q1 59.2 -7.6 -2.0 59.5 -6.9 -3.6

Q2 58.2 -10.3 -1.6 58.5 -9.7 -1.7

Q3 57.2 -11.0 -1.8 57.6 -10.6 -1.6

Q4 54.9 -9.1 -4.0 55.5 -10.1 -3.6

Source: Monetary Authority of Singapore

TABLE 8: CONSUMER PRICE INDEX

Period All Items Food Housing

Clothing

&

Footwear

Trans-

port

Comm-

unications

Education

&

Stationery

Health

Care

Recrea-

tion &

Others

All

Items Food Housing

Clothing

&

Footwear

Trans-

port

Comm-

unications

Education

&

Stationery

Health

Care

Recrea-

tion &

Others

2009 = 100 Year-on-Year % Change

2010 102.8 101.3 102.0 100.4 110.3 97.7 102.7 101.9 101.1 2.8 1.4 2.0 0.5 10.3 -2.2 2.7 1.9 1.2

2011 108.2 104.4 110.5 100.5 123.5 96.2 105.7 104.3 102.5 5.2 3.1 8.3 0.2 11.9 -1.5 2.9 2.4 1.4

2010 Q1 101.1 100.7 100.5 99.4 104.6 97.7 101.7 100.7 100.2 0.9 0.7 -1.7 0.0 8.2 -2.8 1.9 0.8 -0.5

Q2 102.3 101.0 100.9 99.4 110.4 96.9 102.0 101.4 100.8 3.1 1.2 2.2 0.6 12.9 -3.7 2.2 1.7 0.9

Q3 103.4 101.6 102.9 101.1 111.9 98.3 103.3 102.5 101.1 3.4 1.6 3.5 0.4 9.6 -2.0 3.2 2.4 2.0

Q4 104.4 102.0 103.8 101.6 114.2 98.0 103.9 102.9 102.3 4.0 1.9 4.2 1.0 10.6 -0.3 3.7 2.6 2.3

2011 Q1 106.3 103.4 106.6 100.2 121.0 96.5 105.2 103.8 101.1 5.2 2.7 6.1 0.8 15.6 -1.2 3.5 3.0 0.9

Q2 107.1 104.0 108.3 100.1 121.3 96.1 105.4 104.0 102.3 4.7 2.9 7.3 0.7 9.8 -0.8 3.2 2.5 1.5

Q3 109.2 104.7 112.8 100.8 125.2 96.1 106.1 104.4 102.8 5.5 3.0 9.7 -0.3 11.8 -2.2 2.6 1.9 1.7

Q4 110.2 105.7 114.1 101.1 126.4 96.2 106.2 105.1 103.8 5.5 3.6 9.9 -0.4 10.7 -1.8 2.3 2.2 1.5

2012 Q1 111.5 106.6 116.6 101.6 127.6 96.2 108.3 107.5 103.9 4.9 3.0 9.4 1.4 5.5 -0.3 3.0 3.6 2.8


87


TABLE 9: MAS CORE INFLATION Index (2009=100)

Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2000 85.4 85.8 85.5 85.5 85.4 85.5 86.0 86.5 86.4 86.4 86.9 87.0

2001 87.5 87.4 87.4 87.7 87.3 87.1 87.6 87.5 87.3 87.2 87.2 87.0

2002 86.9 87.2 87.0 87.1 87.3 87.3 87.4 87.4 87.4 87.4 87.7 87.7

2003 88.0 87.8 87.9 88.4 87.8 87.4 88.1 88.2 88.4 88.4 88.5 88.7

2004 89.5 89.6 89.7 89.8 89.9 89.7 89.9 89.8 90.2 90.2 90.3 90.2

2005 90.4 90.5 90.7 90.7 90.6 90.4 90.9 91.2 91.2 91.7 91.9 92.0

2006 92.5 92.3 92.3 92.3 92.1 92.0 92.5 92.6 92.6 93.0 93.2 93.5

2007 93.6 93.6 93.5 93.4 93.5 93.5 94.8 95.0 95.2 95.7 96.3 97.6

2008 98.2 98.6 98.7 99.4 99.5 99.5 100.1 100.5 100.5 101.6 101.6 101.7

2009 100.9 100.5 100.6 99.6 99.4 99.3 99.6 99.6 99.6 100.1 100.1 100.2

2010 100.3 100.9 101.0 101.2 101.1 101.0 101.6 102.0 102.0 102.1 102.3 102.3

2011 102.3 102.7 102.8 103.4 103.3 103.3 103.8 104.2 104.2 104.5 104.8 105.0

2012 105.9 105.7 105.8

Note: MAS Core Inflation is the CPI less the costs of accommodation and private road transport. Source: Monetary Authority of Singapore

TABLE 10: BALANCE OF PAYMENTS – Current Account

Current Account Balance Goods Account Services Account Balance Primary

Income

Balance

Secondary

Income

Balance $ Million % of GDP Exports Imports Balance Total

Maintenance

& Repairs Transport Travel Financial

Intellectual

Property Others

$ Million

2010 75,687 24.4 505,937 419,904 86,034 2,084 7,718 10,691 -6,132 12,935 -17,701 -5,428 -5,390 -7,040

2011 71,680 21.9 540,049 455,209 84,841 2,320 8,742 9,673 -3,916 12,883 -19,048 -6,014 -7,039 -8,442

2010 Q1 13,681 18.4 117,078 98,917 18,161 242 2,062 2,603 -2,123 3,025 -4,058 -1,268 -3,062 -1,660

Q2 19,543 25.3 128,481 106,128 22,353 -128 2,139 2,576 -1,652 3,110 -4,927 -1,374 -951 -1,732

Q3 21,545 27.8 131,068 108,174 22,894 1,243 1,754 2,953 -799 2,995 -4,356 -1,304 -802 -1,791

Q4 20,919 25.8 129,310 106,684 22,626 726 1,763 2,560 -1,559 3,805 -4,361 -1,482 -576 -1,858

2011 Q1 18,277 22.4 130,742 109,397 21,344 510 1,891 2,360 -766 3,083 -4,699 -1,358 -1,493 -2,085

Q2 16,939 21.1 134,288 115,201 19,087 206 2,222 2,136 -1,335 3,264 -4,636 -1,446 -320 -2,033

Q3 19,397 23.9 136,577 115,041 21,536 1,478 2,501 2,881 -466 3,183 -4,951 -1,670 -1,425 -2,193

Q4 17,067 20.3 138,443 115,570 22,873 126 2,128 2,296 -1,349 3,353 -4,762 -1,540 -3,802 -2,131


88


TABLE 11: BALANCE OF PAYMENTS – Capital & Financial Accounts $ Million

Period

Capital and Financial Account Balance Net Errors &

Omissions

Overall

Balance

Official Foreign

Reserves

(End of Period) Total Direct

Investment

Portfolio

Investment

Financial

Derivatives

Other

Investment

2010 -17,627 37,390 -36,705 -13,114 -5,197 -579 57,481 288,954

2011 -50,361 48,771 -36,132 -13,980 -49,021 169 21,488 308,403

2010 Q1 6,255 4,425 -14,843 -4,326 21,000 1,109 21,045 275,749

Q2 -6,020 9,817 4,077 -2,953 -16,962 164 13,687 279,829

Q3 -13,574 9,707 -15,989 -2,414 -4,878 -1,699 6,272 282,159

Q4 -4,288 13,440 -9,951 -3,421 -4,357 -154 16,477 288,954

2011 Q1 -10,982 9,684 -14,561 -6,807 703 -1,061 6,235 295,233

Q2 -11,828 12,797 -1,083 -2,070 -21,471 354 5,466 297,445

Q3 -11,048 13,894 -17,059 -2,316 -5,566 1,739 10,087 305,285

Q4 -16,504 12,397 -3,428 -2,786 -22,687 -863 -301 308,403

Source: Singapore Department of Statistics/Monetary Authority of Singapore

TABLE 12: EXCHANGE RATES

End of

Period

Singapore Dollar Per

US

Dollar

Pound

Sterling EURO

100 Swiss

Franc

100 Japanese

Yen

Malaysian

Ringgit

Hong Kong

Dollar

100 New

Taiwan Dollar

100 Korean

Won

Australian

Dollar

2010 1.2875 1.9887 1.7120 137.22 1.5798 0.4175 0.1655 4.4163 0.1141 1.3091

2011 1.3007 2.0048 1.6835 138.20 1.6777 0.4094 0.1674 4.2920 0.1124 1.3200

2010 Q1 1.4028 2.1143 1.8789 131.41 1.5016 0.4285 0.1807 4.4163 0.1238 1.2830

Q2 1.4013 2.1108 1.7113 129.44 1.5822 0.4302 0.1800 4.3546 0.1142 1.1928

Q3 1.3175 2.0872 1.7919 134.80 1.5760 0.4269 0.1698 4.2172 0.1155 1.2748

Q4 1.2875 1.9887 1.7120 137.22 1.5798 0.4175 0.1655 4.4163 0.1141 1.3091

2011 Q1 1.2617 2.0296 1.7828 137.43 1.5248 0.4170 0.1620 4.2808 0.1146 1.3026

Q2 1.2292 1.9802 1.7838 147.97 1.5284 0.4072 0.1579 4.2799 0.1150 1.3202

Q3 1.3003 2.0273 1.7593 144.40 1.6975 0.4076 0.1668 4.2555 0.1102 1.2668

Q4 1.3007 2.0048 1.6835 138.20 1.6777 0.4094 0.1674 4.2920 0.1124 1.3200

2012 Q1 1.2572 2.0083 1.6782 139.19 1.5321 0.4098 0.1619 4.2587 0.1107 1.3074


89


TABLE 13: SINGAPORE DOLLAR NOMINAL EFFECTIVE EXCHANGE RATE INDEX Index (1 Oct 2010=100)

As at Week

Ending S$ NEER

As at Week

Ending S$ NEER

As at Week

Ending S$ NEER

As at Week

Ending S$ NEER

As at Week

Ending S$ NEER

As at Week

Ending S$ NEER

2010 Oct 1 100.00 2011 Jan 7 101.64 2011 Apr 1 102.42 2011 Jul 1 104.11 2011 Oct 7 100.74 2012 Jan 6 101.38

8 99.94 14 101.58 8 102.40 8 104.69 14 102.02 13 101.59

15 100.35 21 101.82 15 103.20 15 104.71 21 101.46 20 102.21

22 100.41 28 101.95 21 103.36 22 104.81 28 102.81 27 103.05

29 100.65 Feb 2 101.94 29 103.45 29 104.97 Nov 4 101.84 Feb 3 103.38

Nov 4 101.03 11 101.98 May 6 103.10 Aug 5 104.38 11 100.57 10 102.75

12 100.94 18 102.09 13 103.03 12 104.81 18 100.38 17 102.72

19 101.17 25 102.05 20 103.62 19 104.56 25 99.90 24 103.05

26 100.55 Mar 4 102.24 27 103.46 26 105.02 Dec 2 101.29 Mar 2 103.53

Dec 3 101.16 11 102.20 Jun 3 103.51 Sep 2 105.13 9 100.35 9 103.52

10 100.80 18 101.58 10 103.60 9 104.46 16 100.71 16 103.64

17 100.67 25 102.32 17 103.63 16 103.73 23 101.35 23 103.44

24 101.35 24 103.83 23 100.78 30 100.92 30 103.55

31 101.67 30 100.66 Apr 5 103.69


TABLE 14: DOMESTIC LIQUIDITY INDICATOR Change from 3 Months Ago

Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 -0.304 -0.235 -0.423 -0.130 0.201 0.238 0.177 -0.041 0.104 0.219 0.287 0.179

2010 0.027 -0.118 -0.062 0.161 0.369 0.335 0.163 0.207 0.327 0.446 0.449 0.291

2011 0.368 0.279 0.318 0.320 0.372 0.420 0.458 0.376 -0.200 -0.813 -0.998 -0.501

2012 0.099 0.499 0.596

Note: The DLI is a measure of overall monetary conditions, reflecting changes in the S$NEER and domestic 3-month interbank rate. Source: Monetary Authority of Singapore

A positive (negative) number indicates a tightening (easing) monetary policy stance from the previous quarter.

Please refer to the June 2001 issue of the MAS ED Quarterly Bulletin for more information.

90


TABLE 15: MONETARY

End of

Period

Money Supply Interest Rates

Narrow

Money

M1

Broad

Money

M2

Broad

Money

M3

Reserve

Money

Narrow

Money

M1

Broad

Money

M2

Broad

Money

M3

Reserve

Money

Prime

Lending

Rate

3-month

Interbank

Rate

3-month

SIBOR

(US$)

Banks

Savings

Rate

12-month

Fixed

Deposit Rate

$ Billion Year-on-Year % Change % Per Annum

2010 112.5 403.1 410.1 40.5 20.3 8.6 8.3 11.5 5.38 0.44 0.30 0.13 0.45

2011 129.1 443.4 451.7 45.4 14.8 10.0 10.1 12.1 5.38 0.38 0.58 0.11 0.32

2010 Q1 97.0 380.0 387.1 36.3 13.9 8.8 8.2 5.5 5.38 0.69 0.29 0.14 0.51

Q2 102.5 382.5 389.5 37.0 18.1 7.3 6.9 5.3 5.38 0.56 0.54 0.14 0.48

Q3 106.8 390.8 397.8 37.9 17.1 8.1 7.8 7.0 5.38 0.50 0.29 0.14 0.47

Q4 112.5 403.1 410.1 40.5 20.3 8.6 8.3 11.5 5.38 0.44 0.30 0.13 0.45

2011 Q1 116.9 413.3 420.4 41.9 20.6 8.7 8.6 15.4 5.38 0.44 0.31 0.12 0.43

Q2 122.3 423.5 430.8 43.6 19.4 10.7 10.6 17.7 5.38 0.44 0.25 0.12 0.43

Q3 128.1 434.8 442.6 44.0 20.0 11.3 11.3 16.1 5.38 0.25 0.37 0.12 0.38

Q4 129.1 443.4 451.7 45.4 14.8 10.0 10.1 12.1 5.38 0.38 0.58 0.11 0.32

2012 Q1 128.9 453.5 462.5 45.4 10.2 9.7 10.0 8.3 5.38 0.38 0.47 0.11 0.29

97.0 380.0 387.1 36.3 13.9 8.8 8.2 5.5 5.38 0.69 0.29 0.14 0.51 Source: Monetary Authority of Singapore

TABLE 16: FISCAL

Period

Operating Revenue Expenditure

Primary

Surplus (+)/

Deficit (−)

Less:

Special

Transfers

Add: Net

Investment

Income/

Returns

Contribution

Budget

Surplus (+)/

Deficit (−)

Total

Tax Revenue

Non-tax

Revenue

Total

Operating

Development Total

of which

Income

Tax

Asset

Taxes

Stamp

Duty GST

$ Million

FY2009 39,547 36,617 17,211 1,987 2,386 6,914 2,930 41,891 30,909 10,982 -2,344 5,481 7,006 -819

FY2010 46,060 41,848 18,687 2,803 3,277 8,198 4,212 45,338 33,270 12,068 722 7,095 7,352 980

FY2011 (Revised) 50,531 45,726 20,533 3,860 2,941 8,750 4,805 47,538 35,865 11,673 2,993 8,582 7,909 2,320

FY2012 (Estimated) 53,083 48,222 22,839 3,686 2,485 9,235 4,861 50,282 37,454 12,828 2,801 8,861 7,326 1,266

% of Nominal GDP

FY2009 14.0 13.0 6.1 0.7 0.8 2.5 1.0 14.9 11.0 3.9 -0.8 1.9 2.5 -0.3

FY2010 14.5 13.2 5.9 0.9 1.0 2.6 1.3 14.3 10.5 3.8 0.2 2.2 2.3 0.3

FY2011 (Revised) 15.1 13.7 6.1 1.2 0.9 2.6 1.4 14.2 10.7 3.5 0.9 2.6 2.4 0.7

FY2012 (Estimated) 15.0 13.7 6.5 1.0 0.7 2.6 1.4 14.2 10.6 3.6 0.8 2.5 2.1 0.4

Source: Ministry of Finance



List of Selected Publications

Title Frequency Web Links

Inflation Monthly Monthly

http://www.mas.gov.sg/eco_research/eco_dev_ana/Inflation_

Monthly.html

Monthly

Statistical

Bulletin Monthly

http://www.mas.gov.sg/data_room/msb/Monthly_Statistical_

Bulletin.html

Recent Economic

Developments Quarterly

http://www.mas.gov.sg/eco_research/eco_dev_ana/Recent_

Economic_Developments.html

Survey of

Professional

Forecasters Quarterly http://www.mas.gov.sg/eco_research/surveys/Survey.html

Macroeconomic

Review Semi-annual http://www.mas.gov.sg/publications/macro_review/index.html

Monetary Policy

Statements Semi-annual

http://www.mas.gov.sg/eco_research/policy_issues/Monetary_

Policy_Statements.html

Financial Stability

Review Annual http://www.mas.gov.sg/publications/MAS_FSR.html

Economics

Explorer Occasional

http://www.mas.gov.sg/eco_research/eco_education/Economic_

Explorer_Series.html

Monographs Occasional

http://www.mas.gov.sg/publications/monographs/Info_Papers_and_

Monographs.html#monographs

Staff Papers Occasional http://www.mas.gov.sg/publications/staff_papers/index.html

Monographs

Title Date Web Links

Tenets of

Effective

Regulation Jun 2010

http://www.mas.gov.sg/publications/monographs/Tenets_of_Effectiv

e_Regulation.html

MAS’ Framework

for Impact and

Risk Assessment

of Financial

Institutions Apr 2007

http://www.mas.gov.sg/publications/monographs/Framework_for_

Impact_and_Risk_Assessment_of_Financial_Institutions.html

Monetary Policy

Operations in

Singapore Apr 2007

http://www.mas.gov.sg/publications/monographs/Monetary_Policy_

Operations_in_Singapore.html



Title Date Web Links

MAS' Roles and

Responsibilities

in Relation to

Securities

Clearing and

Settlement

Systems in

Singapore Aug 2004

http://www.mas.gov.sg/publications/monographs/Securities_

Clearing_Settlement_Systems.html

Objectives and

Principles of

Financial

Supervision in

Singapore Apr 2004

http://www.mas.gov.sg/publications/monographs/Financial_

Supervision.html

Singapore’s

Exchange Rate

Policy Feb 2001

http://www.mas.gov.sg/publications/monographs/Singapore_

Exchange_Rate_Policy.html

Staff Papers

Paper No. Date Title

51 Aug 2011 A Review of the Core Inflation Measure for Singapore

50 Jun 2009 An Empirical Analysis of Exchange Rate Pass-Through in Singapore

49 Dec 2008

Risks and Regulation of Islamic Banks: A Perspective from a

Non-Islamic Jurisdiction

48 Nov 2007

Ten Years from the Financial Crisis: Managing the Challenges Posed by

Capital Flows

47 Aug 2007 Perspectives on Growth: A Political-Economy Framework

46 Jun 2007 Fertility & the Real Exchange Rate

45 May 2007 A Survey of Recent Discourse on the Global Imbalances

44 Apr 2007 Checking Out: Exit from Currency Unions

43 Apr 2006

Singapore's Exchange Rate-Centred Monetary Policy Regime and its

Relevance for China

42 Dec 2005 China's Rise as a Manufacturing Powerhouse: Implications for Asia

41 Dec 2005

The Welfare Analysis of a Free Trade Zone: Intermediate Goods and

the Asian Tigers

40 Sep 2005

Macroeconomic Stability in Developing Countries:

How Much is Enough?

39 Jul 2005 Two Decades of Macromodelling at the MAS

38 Dec 2004

Macroeconomic Determinants of Banking Financial Performance and

Resilience in Singapore




37 Dec 2004

Managed Floating and Intermediate Exchange Rate Systems:

The Singapore Experience

36 Dec 2004

The Long-Run Real Effective Real Exchange Rate of Singapore:

A Behavioural Approach

35 Nov 2004

Review of Literature & Empirical Research: Is Board Diversity

Important for Corporate Governance and Firm Value?

34 Aug 2004 FSAP Stress Testing: Singapore’s Experience

33 Aug 2004 Singapore’s Balance of Payments, 1965 to 2003: An Analysis

32 Jul 2004 Case Study on Pan-Electric Crisis

31 Jun 2004 Singapore’s Unique Monetary Policy: How Does it Work?

30 May 2004

Using Leading Indicators to Forecast the Singapore Electronics

Industry

29 Mar 2004 Review of Literature & Empirical Research on Corporate Governance

28 Feb 2004 Why has there been less Financial Integration in Asia than In Europe?

27 Feb 2004 Does the WTO Make Trade More Stable?

26 Jan 2004

Education for Growth: The Premium on Education and Work

Experience in Singapore

25 Jun 2003

Investigating the Relationship between Exchange Rate Volatility and

Macroeconomic Volatility In Singapore

24 Sep 2002 Do We Really Know that the WTO Increases Trade?

23 Sep 2002

Assessing Singapore’s Export Competitiveness through Dynamic

Shift-Share Analysis

22 Aug 2002

The Effect of Common Currencies on International Trade:

Where Do We Stand?

21 Dec 2000

Kicking the Habit and Turning Over A New Leaf: Monetary Policy in

East Asia after the Currency Crisis

20 May 2000

Financial Market Integration in Singapore: The Narrow and the

Broad Views

19 Feb 2000

Exchange Rate Policy in East Asia after the Fall: How much have

Things Changed?

18 Jan 2000 A Survey of Singapore's Monetary History

17 Nov 1999

Extracting Market Expectations of Future Interest Rates from the

Yield Curve: An Application Using Singapore Interbank and Interest

Rate Swap Data

16 Sep 1999

Interbank Interest Rate Determination in Singapore and its Linkages

to Deposit and Prime Rates

15 Jul 1999 Money, Interest Rates And Income in the Singapore Economy

14 Jun 1999 The Petrochemical Industry in Singapore




13 May 1999

How well did the Forward Market Anticipate the Asian Currency

Crisis: The Case of Four ASEAN Currencies

12 May 1999

The Term Structure of Interest Rates, Inflationary Expectations and

Economic Activity: Some Recent US Evidence

11 Mar 1999

Capital Account and Exchange Rate Management in a Surplus

Economy: The Case of Singapore

10 Dec 1998 Measures of Core Inflation for Singapore

9 Oct 1998 Export Competition Among Asian NIEs, 1991-96: An Assessment

8 Oct 1998 The Impact of the Asian Crisis on China: An Assessment

7 Aug 1998 Singapore's Trade Linkages, 1992-96: Trends and Implications

6 May 1998

What Lies Behind Singapore's Real Exchange Rate? An Empirical

Analysis of the Purchasing Power Parity Hypothesis

5 May 1998 Singapore’s Services Sector in Perspective: Trends and Outlook

4 Feb 1998

Growth in Singapore's Export Markets, 1991-96:

A Shift-Share Analysis

3 Dec 1997 Whither the Renminbi?

2 Aug 1997 Quality of Employment Growth in Singapore: 1983-96

1 Jan 1997 Current Account Deficits in the ASEAN-3: Is there Cause for Concern?

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