SMS S. Iswaran's reply to Parliament Questions on stagflation and the economic outlook

Question No 665 of Notice Paper No 141 of 2008

Question No 676 of Notice Paper No 146 of 2008

Name and Constituency of Member of Parliament
Dr Lily Neo, Member for Jalan Besar

Question
To ask the Minister for Trade and Industry (a) what is the prospect of stagflation affecting Singapore, if it has not already set in; and (b) what are the measures considered to avoid the pitfalls of stagflation.

Name and Constituency of Member of Parliament
Miss Penny Low, Member for Pasir Ris-Punggol

Question
To ask the Minister for Trade & Industry (a) what is the outlook for the Singapore economy in the short and medium term given the current global situation; (b) whether his Ministry intends to revise our annual growth rates; and (c) what advice can the Ministry give to employers and employees to keep afloat in this uncertain time.

Answer
Economic Outlook
Mr. Speaker, Dr Lily Neo has asked about stagflation and the prospect of stagflation affecting Singapore. Stagflation refers to a prolonged situation of stagnant economic activity coupled with high inflation. This happened in the mid-1970s when many of the OECD countries (notably the US and UK) experienced high inflation, sluggish economic growth, and rising unemployment.

Mr. Speaker Sir, Singapore is not facing stagflation. Singapore’s economy grew by 4.3% in the first half of this year, and based on the latest GDP advance estimates, this is within our medium term potential rate of growth of 4-6%.Our job market remains healthy. In the first quarter of the year, more than 73,000 jobs were created, and unemployment remains low.

The momentum of economic growth has recently slowed and global economy is expected to remain soft for the second half of 2008.In the US, there are significant vulnerabilities in the financial sector. And in the other major developed economies like Japan and Germany, they also expect to see further softening, as they are confronted with the challenges of high oil prices and weak consumer confidence.

In Asia, on the other hand, economic growth has been fairly robust. China’s GDP grew by 10.6% in the first quarter of this year, while India’s GDP grew by 8.8%. But both China and India are facing record levels of high inflation and have started to take steps to contain inflationary pressures. These in turn could dampen growth.

In Singapore, the strong pipeline of foreign investments and tourism projects we have secured, will also provide a certain amount of support to the economy for the rest of this year and beyond. These new projects will give rise to new activity and help to create new jobs.

Earlier in May, the Ministry of Trade and Industry estimated Singapore’s GDP growth for this year at 4% to 6%.We will review this forecast in August, after we have compiled all the relevant data for the first half of 2008. 

Moving to inflation, the other aspect of stagflation - since the middle of 2007, CPI inflation in Singapore has accelerated, reaching 7.5% in May 2008. This is due largely to the sharp increases in global prices for food and fuel, which have also affected other countries. We expect some moderation in inflation in the second half of 2008, as the effects of the GST increase wash out and food prices peak. But inflation is not likely to return to previous levels anytime soon.

The government has put in place several measures to dampen inflation and to help Singaporeans cope with the higher costs of living. The stronger Singapore dollar has helped to reduce imported inflationary pressures arising from the higher prices of food and oil.

At the same time, we must take care that wage growth does not exceed growth in productivity, so as not to set off a domestic wage-price inflationary spiral. The National Wages Council has recommended that companies grant sustainable wage increases that commensurate with performance.

As a price taker, Singapore cannot avoid the effects of global inflation. But we can aim to reduce the impact of higher inflation on Singaporeans, by using our limited resources in a targeted way to help those most affected by higher prices. The GST Offset Package and rebates on utilities and conservancy charges will help to ease the impact of higher prices faced by Singaporeans. The Growth Dividends, with more going towards the elderly and the needy, will also provide some relief.

Miss Penny Low has asked for advice for employers and employees in this environment. During this period of economic volatility, it is important that our companies continue to upgrade their business capabilities and enhance their competitive edge. This will give our companies the requisite capacity to withstand the challenges of slower growth as well as to capitalize on market opportunities especially when growth recovers. We are committed to building the capacity of our companies. For example, SPRING’s various programmes support the development of enterprise capabilities in the areas of automation, technology innovation, IT adoption and management development.

It is also important for employees to proactively upgrade their skills, so as to ensure that they remain productive and relevant to the changing economy. Working with the Ministry of Manpower and the Workforce Development Agency, we will ensure that there are appropriate continuing education and training (CET) programmes for all our workers – from the rank and file to professionals and managers – to help them weather uncertainties in the economic environment.