A month ago, the Monetary Authority of Singapore (MAS) decided to keep the Singdollar policy unchanged even as economic growth surged to 3-year high. By now, we already know that economic growth is made up of consumer expenditure, investment expenditure, government expenditure and lastly, net exports. The economy grows when the amount of final goods and services increases.
In a small economy like Singapore, it is not surprising that economic growth is mostly contributed by net exports. This time, growth was largely driven by a surging electronics manufacturing sector, which had gotten a boost from strong global demand for semiconductors and related gear.
Singdollar policy kept unchanged
In addition to this, the MAS had also decided to keep its Singdollar policy unchanged. Due to its size and economy structure, Singapore is the only economy that uses exchange rate as its main monetary policy tool to strike a balance between imported inflation and economic growth. The rate is allowed to float within a policy band that can be adjusted when the monetary policy is being reviewed. This exchange rate is managed against a basket of currencies of Singapore’s major trading partners.
A stronger Singdollar, which also implies a tighter monetary policy, counters inflation by making imports cheaper. A weaker Singdollar on the other hand, helps to push for economic growth by making exports cheaper.
Right now, the Singdollar policy band is on a path of zero appreciation against the currencies of key trading partners – a “neutral” policy incorporated in April last year amid slow growth and low inflation. Low inflation is always a good idea as it encourages savings, investments, economic growth and helps an economy to stay competitive. Slow growth on the other hand, has an effect on the economy’s prospects on future investments, apart from a slow-moving consumer and investment expenditure. Unemployment could increase which is detrimental to the society as well.
An increase in economic growth would usually help the economy to achieve full employment when the labour force is generally expanding to meet demand. The standards of living may rise on a whole as higher outputs and income increases government tax revenue which makes it easier for governments to increase healthcare standards, raise educational standards and provide better transportation systems, without having to raise tax rates. Of course, if this growth continues to persist, then Singapore is likely to run an inflation risk – a demand-pull type of inflation that arises due to an increase in aggregate demand.
Since growth have been predicted to stabilize or improve slightly in the coming year, core inflation is predicted to increase as well. For now, let us continue to observe a little longer until Q4 results are released.