Costes altos y bajo crecimiento?

The Electronic Sector Purchasing Managers’ index and the overall Purchasing Manager’s index for October released on 5 November do not alleviate the short-term economic strain. Both indices are below 50 and were below expectations too (47.5 vs. 49.8 expected for the electronics sector index and 48.3 vs. 49.5 expected for the overall PMI). Singapore radio noted with some anxiety that Korea and Taiwan export sectors were doing better than that of Singapore. Taiwan trade data for October are due later this week (8 November). The PMI data for Korea and Taiwan improved slightly in October although they continue to signal contraction in manufacturing.

How did Singapore become a high-cost low growth economy? Answers are neither necessarily short nor easy. Ultra-easy monetary policy in the West has resulted in abundant domestic liquidity. In other words, despite the ‘tight’ policy stance based on Nominal Effective Exchange Rate appreciation, there has been a relentless rise in the Singapore foreign exchange reserves. Singapore’s FX reserves including gold are 310 billion U.S. dollars and that of South Korea are around 323 billion dollars. Needless to add, the latter has a much bigger economy. Absent that, the currency would have appreciated more substantially placing a tighter lid on inflation. External demand remains weak and will remain weak for some time to come. Hence, letting the currency rise too slowly does nothing to boost exports nor does it send a signal to boost productivity. Further reduced intake of foreign workers means higher domestic wages and lower output in domestic sectors. Productivity of foreign workers is higher. No surprises therefore that the Monetary Authority expects a sub-2% growth rate and 4% headline inflation rate in 2013. Are Singapore policies and the attitude of its citizens combining to produce a sub-optimal growth-inflation combination? We think so.