REVISION IN 2010 ECONOMIC FORECAST

REVISION IN 2010 ECONOMIC FORECAST: 2.

Mr Liang Eng Hwa asked the Minister for Trade and Industry (a) what are the reasons for the sharp upward revision in the GDP growth forecast for 2010; (b) whether the economic growth is expected to be broad based; (c) whether strong growth is likely to further fuel asset inflation and higher costs; and (d) whether the Ministry still sees downside risks on the horizon.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, MTI recently revised the 2010 GDP growth forecast upwards, from 4.5% to 6.5%, to

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7% to 9%. The revised forecast takes two key factors into account.

First, the Singapore economy posted exceptionally strong growth since the beginning of the year. Based on advance estimates, Singapore’s GDP grew by 32% on a quarter-on-quarter seasonally adjusted annualised basis in the first quarter of 2010. On a year-on-year basis, it expanded by 13%, with robust growth rates recorded in all the key manufacturing, construction and services sectors. This indicates that the economic recovery is becoming broad based and more entrenched.

Second, the upgrade in GDP forecast also reflects further signs of improvement in external economies. Notably, the broad recovery in the US economy, coupled with buoyant domestic demand in China, will support the recovery of trade flows and benefit manufacturers and exporters in the region, including Singapore.

However, we are mindful that several downside risks remain. These include a sovereign debt crisis in Europe and a weak recovery in private final demand as fiscal stimulus measures are gradually withdrawn.

In terms of the outlook for domestic prices, we expect some inflationary pressures to emerge as the economy recovers. Specifically, wage pressures will build as the labour market tightens, while asset values could rise in tandem with the improvement in economic fundamentals. Rising global commodity prices, particularly energy prices, could also push up producer and consumer prices in the economy. The overall CPI inflation in 2010 is thus projected to be between 2.5% and 3.5%. This is higher than the 0.6% inflation in 2009, but lower than the 6.6% inflation in 2008.

Mr Liang Eng Hwa (Holland-Bukit Timah): Sir, two questions. In the

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Economic Review Committee (ERC) Report, it was mentioned that a 3% to 5% GDP growth per year will be healthy for an economy at our stage of development. Given that we have seen such a stunning strong growth for the first quarter and that we could possibly see double-digit growth for the year, I would like to ask the Minister whether there is enough slack or capacity within our economy to sustain such a strong growth.

Secondly, given that high growth will imply rising cost and inflation, besides the strong Singapore dollar policy, will the Government look at other policy tools or measures to rein in inflation and rising asset prices?

Mr Lim Hng Kiang: Mr Speaker, Sir, first, we must take the strong growth this year in perspective. We have had two years of recession. The recession started around the middle of 2008 up to the middle of 2009. In fact, in 2008, our growth was 1%; in 2009, our growth was minus 2%. If we take the three-year period as a whole, the strong growth this year is actually a rebound from the very weak conditions in 2008 and 2009. If we take the three-year period, in fact, this is equivalent to a growth rate of about 2.4% per year. So, it is not something that is beyond the potential capacity of our economy.

Nevertheless, I think during this sharp rebound, we must expect some tightness. As I explained in my answer, we expect pressures to rise in the labour market. We also expect not just domestic factors but also external factors to affect us through higher commodity prices, particularly energy prices. These are some of the consequences that we have to manage with the stronger recovery that we have.

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The main instrument in our monetary policy is to implement changes through the exchange rate. As I will explain in my answer to the next question, this is our key lever for monetary policy. Our economy is very open and we have decided to use the exchange rate rather than the rate of interest. Nevertheless, there are other levers or instruments that we can use, particularly administrative measures with regard to asset prices. The Government has already been doing so towards the end of last year and, again, in February this year. So, we are watching the situation very carefully.