3rd Quarter GDP Growth at 9.4% and MAS move on Singapore Dollar

Based on the advance estimates released by Ministry of Trade and Industry, the Gross Domestic Product (GDP) for the third quarter ending September grew at 9.4% year-on-year (y-o-y) basis (Percentage change over corresponding period of previous year). The economy is well on track to meet the 7-8 per cent growth forecast by MTI in August 2007 for the year as a whole. (Source: MTI’s newsroom article)

 

This is very good economic growth for Singapore in 2007. The growth for this quarter is powered by Construction (15.5% y-o-y) and Manufacturing (12.3% y-o-y). Construction has gotten out from the slow growth for almost 10 years and is expected to continue to grow into next 2-3 years when the Integrated Resorts Projects and the Business and Financial Centre (BFC) at Marina move into full swing.

 

As Singapore’s manufacturing is export driven, its growth in the future will depend on the global demand and in particular the demand from the US. It is difficult at this stage to determine the economy of US in the future as the sub-prime mortgage problem has yet to fully play out. Nevertheless, MAS predicts that the GDP growth for 2008 is potentially between 4-6%. (Source: MAS)

 

“Inflation rose to an average of 2.8% in July-August, with about half the increase attributed to the one-off impact of the GST hike.  The higher inflation also reflected stronger economic conditions and the pass-through of rising business costs to retail prices.  As a result, Consumer Price Index (CPI) inflation is now projected to come in at 1.5-2% for 2007,” MAS reports.

 

This has implication on your investment returns. Your investment returns must be able to cover the inflation rate and more so as not to suffer reduction in the purchasing power of your money.

 

In a move to combat inflation at home, MAS allows the Singapore dollar to strengthen at a slightly faster pace. This way, the prices of imported goods and services can be softened hence reducing business costs. (Source: The Straits Times 11 October 2007).

 

The flip side is that the strengthening of Singapore dollar may cause our exports to be expensive. It was argued that it may not be a serious problem as the Asian currencies are strengthening across the board and the MAS manages the Singapore dollar against a trade-weighted basket of currencies basis.

 

With the stance took by MAS, the US dollar, Sterling Pound, Australian Dollar  and Japanese Yen weakened against the Singapore dollar on Friday trade when compared with Wednesday trade, before the MAS Monetary Policy statement.

 

“The three-month domestic interbank interest rate fell from 3.5% at end-February to 2.5% in June.  While the disruption of US and European money markets in early August had led to a temporary spike in the domestic three-month rate to about 3%, it has since eased to around 2.5%.” (Source: MAS)

 

This means that the domestic interest rate had moved back to 2.5% which was the rate before the sub-prime mortgage problem of US had erupted. It would appear that the credit crunch has eased and there is sufficient liquidity in the banking sector. The current bank savings interest rate is not going to move upward anytime soon.

Written on 10/13/2007 4:24 PM

 

Copyright © 2007, the author known as LKT in Singapore.

 

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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