SINGAPORE'S flagging economy received the results of its latest check-up last Friday, only to find that its symptoms had worsened.
Factory production remained crippled, causing the economy to shrink 0.6 per cent in the first quarter from a year earlier - the first such contraction since 2009.
Inflation, on the other hand, was still at feverish levels. Consumer prices in January and February rose an average of 4 per cent compared with the same months the previous year, according to the Monetary Authority of Singapore (MAS). This is double historical inflation of about 2 per cent.
"Singapore clearly remains the sick man of Asean... the economy continues to struggle badly," pronounced Mr Robert Prior-Wandesforde, director of Asian economics at Credit Suisse.
Such sentiments made the MAS' upbeat economic prognosis on Friday all the more surprising.
The first quarter of 2013 aside, the economy "should see a gradual improvement for the rest of the year, on the back of a recovery in external demand", the MAS said.
In central bank parlance, this was practically a green light to break out the champagne. The MAS also took the rare step of cutting its 2013 forecasts for inflation, which has run persistently high since 2010.
"The MAS hasn't lowered inflation forecasts in a long time", not for the last three years, noted Barclays economist Joey Chew.
"It seems MAS feels quite confident" about its strong Singapore dollar policy and other measures to temper housing and car price rises, she added.
The optimism in the MAS' message is notable not just for its general cheeriness. It is also a signal that the worst has passed for the Singapore economy this year in terms of high inflation and slow growth - if the central bank is proved right, that is.
Inflation: Fever has broken
THE good news first: most economists agree that inflation, a major bugbear for Singapore consumers, will ease from here on.
"Headline inflation has probably peaked and the worst is over," said Bank of America Merrill Lynch economist Chua Hak Bin.
Credit should go to the Government's curbs on car loans and the property market, which have led to a fall in certificate of entitlement (COE) premiums and tempered the rise in home prices.
This will feed into lower overall inflation, which Dr Chua expects at under 4 per cent in April, after hitting an eight-month high of 4.9 per cent in February.
While March's inflation numbers, due next Tuesday, will still be elevated, inflation is likely to drop in the second quarter, said Ms Chew from Barclays.
This will be due to the fall in COE prices and rebates on utility charges that will be distributed to households living in public housing flats this month, she said.
Tamer car and house prices prompted the MAS to cut its overall inflation forecast for this year, by half a percentage point, to between 3 and 4 per cent.
It also trimmed its core inflation forecast - a measure that excludes housing and car costs - from 2 to 3 per cent to 1.5 to 2.5 per cent, as inflation from foreign sources came in lower than expected in January and February.
As Ms Chew explained: "We are experiencing imported disinflation now, with both imported food prices and electricity tariffs down compared with a year ago."
The reduction of both inflation forecasts "is an important signal in communicating that the worst of inflationary pressures is probably past and will subside slightly", said OCBC economist Selena Ling.
Still, inflation will remain higher than in the past. A new source of price hikes - rising wage costs for firms on the back of a tight labour supply - will become more pronounced over the course of this year, the MAS said.
This will have a broader effect than high asset prices, as consumers will have to pay more for a wide range of goods and services.
Another worry is that expectations of high inflation are becoming entrenched in consumer mindsets. If people believe prices will keep soaring, they will demand higher salaries, which will in turn force companies to raise prices and create an inflationary spiral.
Barclays' Ms Chew said: "We don't have official surveys to measure inflation expectations. But anecdotally I think people are still bothered. When 'visible' prices come down however, like COE, I think it helps."
Growth: Still on the mend
ECONOMISTS may agree with the MAS' sanguine outlook on inflation this year, but they are more sceptical of the central bank's growth projections.
"It appears that notwithstanding the weaker-than-expected first-quarter flash data, there is no official pessimism at all," noted OCBC's Ms Ling.
The MAS appears to be mainly banking on a comeback in global trade to pull Singapore's manufacturing and export sectors out of their recent stupor and lead the economy to overall growth of between 1 and 3 per cent this year.
"The outlook for the world economy has improved since late last year," it said. American home prices and private demand are picking up, Japan's government has a big spending package in store, and China's domestic demand is still going strong.
Some positive signs have emerged in Singapore. March's purchasing managers index (PMI), an early indicator of the manufacturing economy's health, pointed to a coming expansion in the sector.
Electronics output is also showing hints of improvement, while Barclays expects the volatile biomedical production and transport engineering segments to catch up later this year, on the back of higher value-added drugs production and full order books for oil rig builders respectively.
But Nomura economist Euben Paracuelles said global conditions have not improved enough to expect that Singapore can beat its growth last year of 1.3 per cent.
"Given how optimistic they are on the external backdrop, the scope for their expectations being disappointed is quite high," he told the Wall Street Journal.
One survey, conducted by the Brookings Institution and the Financial Times, showed yesterday that the global economy is stuck in a rut and overall indicators of growth have hardly budged in the last two years. The ongoing uncertainty in the euro zone also remains a key risk.
Even if global growth does come through - the MAS is not usually known for over-optimism - Singapore's economy may not reap the benefits as easily as it has done in the past.
For one thing, the tight labour market, a result of domestic economic restructuring towards higher productivity, will limit the ability of manufacturers and exporters to exploit a jump in orders.
"No doubt Singapore's trade- related industries will recover if global growth recovers," said Barclays' Ms Chew.
"But to the extent that Singapore's competitiveness has been temporarily affected, given that productivity gains have yet to materialise, the economy may not benefit as much from a stronger global economy as it did before."
Even as higher global growth produces more muted effects on Singapore's economy, it would still raise demand for the limited manpower supply, which "could result in runaway wage growth and inflation", warned Credit Suisse economist Michael Wan.
"In 2010 the (Singapore) economy grew by 15 per cent, and wages surged by 6 per cent in both 2010 and 2011," he noted.
"The bottom line is that inflation tends to be a lagging, rather than leading, indicator of underlying overheating pressures," Mr Wan said.
Thus the MAS is right to keep an eye on the labour market, despite moderations in wage growth and core inflation, he added.
With so much uncertainty still on the horizon, only one thing is for sure: the Singapore economy remains some distance off a full recovery from its current bout of high inflation and slow growth.
The first quarter may have been the trough of ill health for this year, and it is heartening to see some of the treatments for inflation finally taking effect.
But the economy still warrants constant monitoring, lest it slip back into intensive care.
This story was first published in The Straits Times on April 16, 2013
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