As the leader of the world's fastest-growing economic region, Singapore has tightened its monetary policy after reporting the fastest economic growth rate on record. This further illustrates that the recovery being experienced in Asia is far outpacing that of the Western world.
More evidence comes from South Korea. Factors such as a surge in manufacturing hiring have significantly reduced its unemployment rate, and Moody's Investors Service has upgraded South Korea's credit rating to a higher level than it has been since the Asian financial crisis of 1997-1998.
From this data, it is evident that growth in the Asian region continues to exceed expectations; not only is China, which released its first-quarter Gross Domestic Product (GDP) data on Thursday morning, experiencing growth, but so are its various provinces. Additionally, the economic expansion is forcing authorities to address inflationary threats.
Singapore's tightening of policy on Wednesday surprised many economists and increased the likelihood of other central banks in the region taking similar measures. Australia, Malaysia, and India have already raised interest rates, while economies like South Korea and Taiwan have kept their policies at crisis levels to avoid undermining economic recovery.
Some central banks in the Asian region have been reluctant to tighten policies due to concerns that this would weaken the competitiveness of their export products relative to China. Despite the World Bank's forecast that China's economic growth rate will reach 9.5% this year, China has effectively pegged its currency to the U.S. dollar. Interest rate hikes often lead to a stronger local currency, making domestic products more expensive in the global market. However, strong overall growth, along with expectations that China will allow the renminbi to appreciate against the dollar in the coming months, may be loosening the constraints on decision-makers, making it easier for them to tighten policies without worrying that a stronger currency will harm the still-recovering export sector.
After seasonal adjustments, Singapore's trade-driven economy recorded an annualized growth rate of 32% in the first quarter, driven by a 139% surge in manufacturing. Many of Singapore's electronic products are designed for the U.S. and Chinese markets. Although the economic scale of this city-state is relatively small, leading to greater volatility in GDP data, both figures represent the highest growth rates since relevant data has been available since 1975.
Endre Pedersen, Executive Director of Fixed Income at MFC Global Investment Management, stated that this is not just about Singapore; it is also a testament to Asia's strong recovery relative to the rest of the world.
Singapore has raised its 2010 economic growth forecast from 4.5% to 6.5% to between 7% and 9%. The Monetary Authority of Singapore announced in a policy statement that the economic output lost during the recession has been fully recovered, and economic activity across various sectors has surpassed pre-crisis peak levels.
The Asian economy is supported by consumers in the region. With low unemployment rates and rising wages, consumer spending in Asia is relatively free. More importantly, due to the rebound in demand from North America and the growth of internal demand, particularly in China, external demand is driving the prosperity of these export-oriented economies.
Electronics manufacturers are clearly benefiting. The Philippines reported a 42.3% increase in exports in March compared to the same period last year, primarily driven by technological demand and rising microchip prices.
Even Japan, which has long been in economic distress, is showing signs of vitality, with trade and retail sectors beginning to pick up. HSBC recently raised Japan's 2010 GDP forecast from 1% to 1.7%.
Singapore has raised its 2010 inflation forecast from 2% to 3% to between 2.5% and 3.5%. For the purpose of policy tightening, the Monetary Authority of Singapore stated that it will strengthen the Singapore dollar through the re-setting of the key monetary policy band. The Monetary Authority of Singapore also declared that it will allow the Singapore dollar to continue to appreciate gradually against its benchmark currency. The composition of the Singapore dollar's benchmark currency basket is confidential.
This is the first time Singapore has implemented a joint tightening measure since it began policy transparency in 2001.
The Monetary Authority of Singapore does not control inflation through interest rate policies but rather guides the local currency, as the relatively small domestic economy pales in comparison to external trade. Currency appreciation can lower domestic prices by reducing the cost of imported goods.
In addition to consumer price inflation, the influx of speculative funds seeking high interest rates and the rapid rise in asset prices are becoming increasing concerns in the Asian region. In a report released this week, the Asian Development Bank raised its 2010 economic growth forecast for developing Asian countries from 6.6% to 7.5%, while calling for measures to control capital flows to curb the easily retrievable liquidity from the region during a crisis. Such rapid capital movement can trigger economic instability.
