Asia: Rising headline inflation but core inflation to remain benign; Singapore’s post-pandemic economic strategy could have gone further

Highlights from the CAA Weekly Table:

• Asian political risks – watch Malaysia: There is rising resentment against the political class in Malaysia. With the tinder dry, a surge in COVID infections that could strain the healthcare system to breaking point or the embattled leadership’s manoeuvrings to prolong its rule could be the spark for instability.
• Asian economies: Lead indicators give us more confidence in our call for more upside in global demand for Asian exports. China’s growth momentum remains solid despite disappointing April data. With India’s recovery looking shakier, our nowcast forecast for 1Q21 growth has been revised down to just 1.4%. Indonesia, Thailand and the Philippines continue to struggle with the pandemic but some tentative positive signs are emerging.

Asia: Rising headline inflation but core inflation remains benign

• While headline inflation could remain elevated in the near term on higher raw material prices and supply bottlenecks, we still see a large amount of regional spare capacity keeping core inflation relatively benign.
• There are relatively higher upside risks to inflation in China where the output gap has closed and the extent of pass-through of cost increases is greatest, even as the extent of input cost inflation remains comparatively modest.
• Rising input costs are most salient in Taiwan, Malaysia and Vietnam but weak pass-through associated with firms’ pricing power limits the risk of a surge in inflation there.
• Higher food and energy prices later in 2021 could raise headline inflation in India and Thailand, both of which feature relatively high food and energy weights in their CPI baskets.

Singapore’s post-pandemic economic strategy could have gone further

• The Singapore government has lived up to its reputation for forward-thinking by issuing a report on its economic development strategy for the post-COVID future.
• There are some strong points in the Emerging Stronger Taskforce report. There is a welcome bias towards action that can yield near-term gains. Its mobilisation of economy-wide resources towards promising opportunities of the future raises the likelihood of discovering commercially viable products and solutions. Some promising areas of likely development have been identified. Singapore will be making a big push to be a leading carbon trading and services hub. The AgriTech sector will also be a focus of government support.
• That said, the report suffers from an inadequate examination of the Singapore economy’s structural weaknesses. Some of the big issues confronting Singapore are not addressed: What is the optimal rate of inward migration in Singapore? Why have innovation outcomes been so disappointing despite the massive inputs mobilised for innovation? Why are indigenous companies performing so poorly? What can be done about high business costs?
• This raises the question: Without these critical challenges being addressed, can its earnest and well-meaning recommendations really produce the best outcomes for Singapore?

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