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Singapore's GDP to grow by up to 3.5%

Singapore's GDP to grow by up to 3.5%

Singapore's economy is on track to meet growth forecasts after Monetary Authority of Singapore (MAS) Managing Director Ravi Menon revealed on Wednesday that GDP will grow by as much as 3.5% by the end of the year.

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By Staff Journalist 05.07.2018

Singapore’s economy is on track to meet growth forecasts after Monetary Authority of Singapore (MAS) Managing Director Ravi Menon revealed on Wednesday that gross domestic product (GDP) will grow by as much as 3.5% by the end of the year, matching predictions made in May. 

Menon said that risks associated with protectionism and the practice of shielding important industries from foreign investors may become more prevalent in the coming months, but the overall outlook remains positive. He also said that “spillovers from global trade conflicts” need to be watched closely to ensure that they do not have a negative impact on trade.

Bilateral trade between the US and China, the two major players in the current major trade conflict, contribute around 1.1% of GDP in Singapore, according to data made public by the MAS exec. Flows between the EU and US account for around half of that figure, as does the North American Free Trade Agreement (NAFTA) between the US, Canada and Mexico.

Menon has previously described the condition of the global economy as in a “Goldilocks” state, with healthy growth, easy financial conditions and low inflation. However, he did warn earlier in the year that the three bears of protectionism, inflation and financial instability would likely appear at some point to spoil the party. After six months, Menon claims that at least two of the three bears are apparent in the form of protectionism and inflation.

Protectionism is a concern for Menon, as it is a factor in the current trade fronts. Major trading partners with the US are already feeling the heat as tariffs on imports such as aluminum, steel, washing machines and solar panels are already in effect.

 Meanwhile, 25% tariffs on USD $50bn worth of Chinese imports are in the offing, while 10% tariffs on a further USD $200bn are at the center of the trade conflict this week. China has hit back with retaliatory tariffs, as has the EU, and Menon has warned that “spillover effect” could be disastrous for the global economy in the long term.

"The immediate effect of these trade restrictions is limited and does not threaten global growth – yet," Menon said. "The real risks from the tariffs are spillover effects, escalation and economic uncertainty – all of which could severely undermine global growth”

He went on to say that if these conditions do indeed escalate into a trade war, the “three engines of global growth” will inevitably stall, namely manufacturing, trade and investment.

Menon said that momentum has reduced and global “tail risks” have become much more pronounced since the start of the calendar year. Rapid inflation is also a possibility, as it is on an upward trend across the globe and has now hit the 2% target in the US.

“The expectation now is for two more rate hikes this year,” Menon said. “But if inflation surprises on the upside, the Fed could be compelled to hike more. This would tighten global financial conditions by more than currently anticipated."

The MAS exec believes that more stringent financial conditions could lead to less corporate spending, while rising interest rates may be a major problem for organizations in emerging markets. Menon concluded by saying that an uptick in the issuance of US Treasury Bills and the unwinding of the Federal Reserve’s balance sheet could lead to “bouts of financial volatility,” though Asian markets may be better prepared to absorb any financial shocks.

“Economic fundamentals in emerging Asian economies are stronger since the taper tantrum in 2013.  Foreign reserves and bank capital buffers are larger, while financial regulatory frameworks are more robust. And policymakers in Asia are more prepared to make macro-policy adjustments as needed, including pre-emptive interest rate hikes to support exchange rate stability," Menon said.

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