Singapore’s output gap weighing on inflation
- Singapore’s CPI inflation has persistently surprised on the downside
- Output gap has turned increasingly negative
- Implication for our forecast - we have lowered headline CPI and core inflation forecasts for 2019
- Implications for investors – monetary policy easing is on the cards
On the moderation in the headline CPI inflation, the Monetary Authority of Singapore (MAS) pointed out that this was “largely on account of a decline in the cost of retail & other goods, a steeper fall in the cost of electricity & gas, as well as lower services inflation.” The introduction of the Open Electricity Market (OEM) has helped to lower utility costs. E-commerce is also probably having an impact on retail prices. Beyond that, lower oil prices (down 12-15% YoY in July) have helped to partially offset higher COE premiums, hence moderating transport inflation.
Negative output gap
Though the lower inflation is a confluence of many factors, both domestic and external, we reckon that the over-arching reason for the lower inflation is slower growth. GDP growth in the second quarter slumped to 0.1% YoY, the weakest since the global financial crisis period in 2008/09. On the margin, the economy contracted by 3.3% QoQ saar. A challenging global economic climate, compounded by the ongoing trade war between the US and China, are the key drivers behind the subpar growth performance.
Weaker growth momentum is weighing down on inflation. The surprise dip in core inflation is by no way a mere coincidence. Core inflation does not include private transport costs and imputed rental, and hence, is typically considered a better measurement of underlying price pressure since it is not subjected to the policy effects from changes in COE premiums and property cooling measures.
Our analysis suggests that output gap has turned even more negative in the second quarter. This implies an increase in risk of disinflation as a result of the decline in growth impetus. If this persists, which is likely given the current economic conditions, overall inflation in the coming months will turn out significantly lower than expected. There is a risk that headline inflation could touch zero or dip into negative in the next two months.
Though base effect from the OEM could fade towards the end of the year, resulting in possible uptick in inflation, overall trajectory on inflation will still be lower given the negative output gap. With this in mind, we now expect 2019 full year inflation to register 0.5% (from 1.1% previously), which is also at the low end of the official inflation forecast range of 0.5-1.5%. Separately, we expect core inflation to average 1.1% for the year, down from our previous forecast of 1.3%.
Monetary easing ahead
Against the backdrop of a grim economic outlook, negative output gap and benign inflation, a change in a parameter of the policy band in October is pretty much cast in stone. The SGD NEER is gradually shifting towards the mid-point of the policy band, suggesting that adjustment in monetary policy is on the cards. The key question is the shape and form of the forthcoming policy easing, and there are a few options available for the authority.
We reckon that MAS will moderate the slope of the SGD NEER policy band in a calibrated manner. Though there is room for a more pre-emptive and aggressive monetary policy action, such as shifting towards a zero-appreciation stance, there are several considerations for that to happen. For example, the economy may have to dip into a technical recession in 3Q, and risk entering an all-out recession in 2020 to warrant such an action; or that global outlook deteriorates sharply in the coming months, thereby prompting global central banks to ease monetary policies more aggressively.
Calibrated policy responses
Unless these factors pan out in the coming months, the MAS can still afford to take a more calibrated approach in managing its monetary policy. Furthermore, the fact that the government has yet to announce any short-term stimulus package does suggest that authorities are not in a “crisis management” mode yet.
The exchange rate based monetary policy regime adopted by Singapore is also more suited for managing the balance of risks between inflation and growth on a medium-term basis, rather than for short term counter cyclical purpose. In this aspect, we do expect a robust expansionary fiscal policy in the upcoming budget early next year. The outsized accumulated surpluses of more than SGD 15bn would allow policymakers to focus on both near term counter-cyclical, as well as long-term economic transformation purposes.
To read the full report, click here to Download the PDF.
The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.
DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong.
PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422