Impact of the Global Monetary Easing on Prices and Wages in SingaporeAurobindo Ghosh |
Through the Financial Crisis of 2008, policymakers were all too aware of the mistakes made after the Great Depression. After all, it took a world war to get out of an economic downward spiral. One economist who specialized in depression-era economics, a certain Princeton professor, Ben Bernanke, is currently the Chairman of the Federal Reserve Board, the Central bank in the US.
The question was: “How would the world get out of a slump second in severity only to the Great Depression?”
One option is to make interest rates lower, to reduce the cost of borrowing. In a concerted effort unprecedented in its history, the G-20 group of countries adopted coordinated action to tackle the crisis.
Expansionary policy or, popularly termed, “printing money” to encourage growth and reduce unemployment, has an adverse consequence of a rise in inflation. For our neck of the woods, the Singapore CPI-All Items or Headline inflation rate could be attributed to both increases in real estate and private transportation, and structurally to increases in rentals and wages affecting the cost of doing business.
In the quarterly MasterCard-SKBI SInDEx Survey, the One-year-Ahead Headline Inflation rate of 4.68 percent is closer to the realized CPI-All Items inflation rate of 4.2 percent than even the Survey of Professional Forecasters, who predicted 2.8 percent. Currently, the One-year-Ahead Headline Inflation rate of 4.37 percent (CPI All Items) is slightly lower than the composite weighted SKBI-MasterCard Singapore Index of Inflation Expectations (SInDEx1) of 4.4 percent collected in December 2012.
The new question: “Have very low global interest rates had an adverse impact on Singapore prices?”
The short answer is “yes”. Investors are becoming savvier by the day, with increasing access to information, financial services and advice. They are also wary of what the unlimited-horizon easy monetary policy entails in the Western economies (including comments and actions by Bernanke and Mario Draghi, his counterpart in the European Central Bank).
But, a knock-on consequence is investors’ “flight to quality” investment destinations in Asia, such as in Singapore. I would like to call this attracting “smart money”, and not just “hot money” to the region. This might have caused a run-up in real estate prices in the short-run (when supply cannot keep up). The second, more subtle, but more damaging, consequence is the decrease in purchasing power, or real interest rate. The trifecta of “unhinged”, or uncontrollably high, long-term inflation expectations, a low nominal interest rate and a moderate-to-high actual inflation rate might cause a long-term decrease in purchasing power.
Nevertheless, Singapore is in a privileged position both geographically and historically. In fact, a recent survey by the Economics Intelligence Unit (EIU) puts Singapore at number 6 globally on its where-to-be-born in 2013 index. The country is benefiting from a significant exodus of finance professionals from the Eurozone and the U.S., as well as a growing and outward-looking educated middle class from India and China in search of a suitable business and living environment.
Topics: Economic Outlook