Strong Q1, will growth keep up?

Strong Q1, will growth keep up? 

Record jobs created, resilient GDP ahead – but inflation, labour costs a concern

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IT WAS, in the words of one analyst, an “extraordinary” first quarter for the job market in Singapore. And looking ahead, economic growth forecasts by private-sector economists — though adjusted downwards — have turned out better than expected.

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Even with a slowdown predicted for the months ahead, a record 73,200 jobs were created in the first quarter of the year, according to the Ministry of Manpower’s (MOM) Labour Market report released yesterday.

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Meanwhile, the Monetary Authority of Singapore’s (MAS)latest survey of forecasters showed that Gross Domestic Product (GDP) could increase 5.5 per cent this year, marginally down from the median forecast growth of5.6 per cent in the previous quarterly survey in March.

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Such resilient figures are thanks to surprisingly bullish growth of 6.7 per cent in the first three months, say analysts. This “stronger than expected” showing, said DBS economist Irvin Seah, “shows that things are holding up pretty well, that’s why you don’t see further downgrades.”

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It was also not surprising to see robust employment growth in the first quarter, said Institute of Policy Studies adjunct senior research fellow Manu Bhaskaran.

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But would such figures remain as high for the rest of the year? “I see businesses becoming much more cautious about expansion and about raising costs as we go further into 2008 and 2009,” said Mr Bhaskaran. “So, I suspect the tight labour market might ease a bit.”

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Also, job market figures tend to be a lagging economic indicator, said Deutsche Private Wealth Management Asian strategist Chua Hak Bin: “First-quarter job growth probably reflected the intentions of firms late last year, as hiring plans take some time to execute. Firms probably turned more cautious early this year with the US slowdown and global credit crunch. This may show up more visibly in the second and third quarter, with job growth likely falling off.”

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Recent employment surveys conducted with employers reflect this: Manpower Singapore’s report last week stated that employment growth would continue, but at a slower pace.

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The overall unemployment rate rose to 2 per cent from 1.7 percent last December – a figure Mr Bhaskaran expects to see climb as companies restructure to become more competitive.

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As for the economy, Forecast Singapore economist Vishnu Varathan projected slower growth, with some “buffering effect” from the construction and financial services sector.

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“The economy is expected to grow at a fairly resilient 5.5 per cent because we expect to see good investments in Singapore petrochemical plants. And you also have certain sectors of financial services still commited to spending in Singapore. Investments will be part of the story,” he said.

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But a moderation in the manufacturing sector, the most vulnerable to a global slowdown, would hurt GDP growth, said Mr Seah. The stronger Sing dollar has also made exports more expensive.

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The bigger worry, said economists, is inflation. The MAS survey reported this is likely to rise 6 per cent this year, at the top end of the Government’s forecast of 5 to 6 per cent.

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Noting Singapore’s reliance on imports, Mr Varathan will be looking more closely at inflation numbers in neighbouring countries and fuel price hikes. “When there had been specific supply shortages in certain regions, we have always skirted inflation or supply pressure by diversifying the sources of our imports. But now, given that is a global trend and there are fuel hikes in the region, and that most of our food supply comes from the region, we can’t run away from higher prices,” he said.

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While the Government expects inflation to ease in the second half, after the impact of the Goods and Services Tax (GST) wears off, economists warn this could be offset by imported inflation. Fortis Bank senior strategist Joseph Tan said: “It’s not going to come down as much as what we previously hoped.”

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The spike in nominal wage growth could also potentially feed into domestic inflation, as “higher wage expectations push prices up further”, said Standard Chartered Bank economist Alvin Liew.

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Overall unit labour cost (ULC) rose for the eighth consecutive quarter, rising by 8.8 per cent compared to last quarter’s rise of 6 per cent, while labour productivity dipped further by 2.8 per cent.

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This, however, did not worry all analysts.

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“It is not surprising that ULC should rise in a period of high economic growth and tight labour market as we have experienced,” said Mr Bhaskaran. “The key is the trend over a cycle, so we should not focus just on a few quarters.”

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UOB economist Ng Shing Yi said the ULC might improve year-end, when companies stop recruiting at such a feverish pace.

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But HSBC economist Robert Prior-Wandesforde warned that higher labour costs created additional pressures. “The implication is that firms either need to raise prices or take a hit on their profit margins … It certainly doesn’t bode that well for underlying inflation pressures in the country.”

 

Source: Today Newspaper

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