Singapore's Central Bank keeps policy neutral as 1Q GDP shrinks on 1.9 quarter.

Singapore central bank keeps policy neutral as 1Q GDP shrinks 1.9% on quarter

Private economists remain optimistic about full-year growth

SINGAPORE (Nikkei Markets) -- Singapore's economy lost momentum in the first quarter and the central bank said growth for the full year would be similar to last year's, confounding economists whose estimates were more bullish.

The Ministry of Trade and Industry's flash estimates released on Thursday showed the economy shrank 1.9% quarter-on-quarter in the first three months of the year on an annualized and seasonally adjusted basis.

The drag came from manufacturing, which contracted 6.6% after surging 39.8% in the preceding quarter.

Year-on-year, the economy grew 2.5% in the January-March period, easing from the 2.9% expansion in the last quarter of 2016.

The Monetary Authority of Singapore, which released its semi-annual policy decision around the same time, sounded a cautious note about manufacturing and noted other soft spots in the economy.

While the MAS's decision to keep policy unchanged was widely expected, its comment that the neutral policy stance would be "appropriate for an extended period," was a surprise.

Many economists had forecast the central bank would revert to its usual stance of allowing "a modest and gradual appreciation" of the local currency when it next issues its policy statement in October.

"By keeping the word 'extended', the MAS signals that it is not too comfortable about the recent strength in the Singapore dollar," said Francis Tan, an economist at United Overseas Bank in Singapore.

Singapore's trade-driven economy quickened towards the end of last year as global demand recovered, benefiting the city-state's exports. However, the job market continued to languish, with the resident unemployment at its highest since 2010.

Thanks to the boost from manufacturing in the final quarter, the economy grew 2.0% last year, beating most forecasts.

According to the MAS's latest Survey of Professional Forecasters, economists expect the recovery to continue this year with gross domestic product expanding 2.3% based on the median estimate.

In its comments, the MAS said the outlook for the global economy has improved slightly, although downside risks remained alongside significant policy uncertainty.

It also said the underlying momentum in the Singapore economy remains intact despite the pullback in the first quarter, with the output of electronics and related services segments still at healthy levels.

However, the central bank added that the rest of the manufacturing sector would remain patchy, and that spending on discretionary retail items and other services would be dampened by the still-subdued labor market and weak consumer sentiment.

"Overall, the economy should expand by 1%-3% in 2017, not markedly different from the growth of 2% in 2016," it added.

Unlike most central banks, which target interest rates, the MAS manages monetary policy by influencing the value of the Singapore dollar against an undisclosed basket of currencies. It said Thursday that it would keep the Singapore dollar on a zero-appreciation path.

"We now believe the central bank will keep to the existing policy stance in the October 2017 meeting, unless actual economic conditions turn out drastically different from their forecast," UOB's Tan said.

UOB expects the Singapore dollar to ease to around 1.46 against the U.S. dollar by the end of 2017, from current levels around 1.3950. However, it is maintaining its GDP growth forecast for Singapore at 2.4%.

Other economists were even more bullish about the city-state's economy, predicting GDP data would be revised upwards when MTI releases its more detailed economic survey in May.

"The finalized 1Q GDP will likely be upgraded, in our view, as services growth shows a broader recovery," said Chua Hak Bin, an economist at Maybank Kim Eng, the investment banking and securities arm of Malayan Banking Bhd. Chua said MTI's conservatism was reflected in the fourth quarter GDP upgrade to 2.9% from the flash figure of 1.8%.

His view was shared by David Carbon, chief economist at DBS Group Holdings, Singapore's largest bank, who said the economy remained on track to meet DBS's full-year growth forecast of 2.8%.

MTI's advance estimates are based primarily on data for the first two months of the quarter, and may be revised when detailed growth figures are published.

--Kevin Lim

--Nikkei Markets is a real-time financial news service for South East Asia's markets published by Nikkei NewsRise Asia Pte Ltd, a Nikkei and NewsRise joint venture company. Nikkei Markets provides wide companies coverage in the region, including the Nikkei's Asia300 companies.

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United Overseas Bank Ltd. (Singapore), DBS Group Holdings Ltd.

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Singapore central bank keeps policy neutral as 1Q GDP shrinks 1.9% on quarter