Cost pressure continued to build amid strong economic growth in the second quarter of this year, with business costs and consumer prices creeping up.

Cost pressure continued to build amid strong economic growth in the second quarter of this year, with business costs and consumer prices creeping up.

The unit business cost index of manufacturing grew 1.9 per cent from the same quarter a year earlier, after rising 3.3 per cent in Q1, the latest quarterly figures from the Ministry of Trade and Industry (MTI) show.

And overall unit labour cost (ULC) climbed 5.7 per cent in Q2 from a year ago, following a 5.9 per cent increase in Q1. Manufacturing ULC grew at a slower pace of 3.1 per cent in Q2, after a 7.1 per cent increase in Q1.

‘All three components rose, viz manufacturing ULC, services cost and government rates and fees. Increases in rental and higher property tax as a result of higher property prices remained the main contributors to the rise in service costs and government rates and fees respectively,’ MTI said in its second-quarter economic survey report.

There are worries that escalating business costs could hurt competitiveness and stifle growth, but the Monetary Authority of Singapore says cost increases so far have largely been in line with economic growth.

‘The economy has already been stocking up 15 quarters of growth,’ the executive director of MAS’s economic policy department, Edward Robinson, said at a briefing yesterday on Singapore’s economic growth in Q2.

‘We do expect some nominal costs to increase,’ he said. ‘It does vary across industries and sectors. But overall we are satisfied at this juncture that the Consumer Price Index remains contained within the policy stance of price stability.’

Driven by higher fuel prices, producer prices also crept higher in Q2 from Q1. The domestic supply price index was 4.2 per cent higher than in Q1 as prices of crude petroleum and concrete rose. But compared with a year earlier, all producer price indices fell, with prices of fuel oils, disk drives and integrated circuits used in manufacturing lower than a year earlier.

While the CPI in the first half benefited from relatively lower oil prices than a year ago, there is risk of higher average oil prices in the second half of this year, said Ong Chong Tee, MAS deputy managing director for research, monetary policy and investments development and external relations. He predicted this will raise consumer inflation to the higher end of the government’s full-year CPI forecast of 0.5-1.5 per cent.

Year on year, the CPI rose one per cent in Q2 after growing by 0.5 per cent in the first quarter, as holiday travel costs, food prices and taxi fares rose.

For the second half of this year, MTI expects the oil price to be about US$75 a barrel after it hovered around US$65 in the first seven months of the year.

Sharing the government’s view, private-sector economists also expect a build-up in inflationary pressures in the second half, as the economy feels the heat of rising rents, loans growth and higher wages and commodity prices.

‘Couple these with the effects of the GST hike, and inflation is expected to approach the 1.5 per cent year-on-year level, and possibly a tad higher for some months going ahead,’ DBS Bank economist Irvin Seah said, pegging his full-year CPI estimate at 1.4 per cent.

Citi economist Chua Hak Bin expects consumer inflation to be 2 per cent at end-2007, citing higher public transport fares, higher electricity costs and a labour and property crunch.

Manufacturing growth may keep pace: EDB

The fast pace of manufacturing growth in the first half of this year is expected to be sustained in the second half, the Economic Development Board (EDB) said yesterday.

It will be supported by the transport engineering cluster and particularly the buoyant marine offshore segment, EDB said.

Other sectors are also expected to put up a good showing, said Bernard Nee, director of planning in the board’s planning and policy division.

‘We are optimistic,’ he told reporters at a briefing on the second-quarter economic survey.

Industrial production grew 8.3 per cent in the second quarter from a year earlier, after growing 4.4 per cent in Q1.

Growth in Q2 was driven by a 31.3 per cent jump in transport engineering output.

In the second half, biomedical manufacturing is expected to sustain the momentum it showed in Q2, when it grew 10.8 per after a 5.1 per cent contraction in Q1.

Mr Nee said the chemicals segment is expected to remain stable. ‘Growth is expected to be higher in the second half due to higher capacity and a low base in 2006 because some plants were (shut) down for maintenance.’

The lacklustre electronics cluster is likely to experience an improvement in business conditions in the next six months, he said.

The effect of the relocation of disk storage production will blow over in the second half.

The chemicals cluster grew 1.4 per cent in Q2 after rising 1.2 per cent in Q1, as production of petroleum and petrochemicals improved.

But growth of electronics production eased to 2.5 per cent in Q2 from 2.8 per cent in Q1, with all segments except semiconductors posting declines.

Source : Business Times - 11 Aug 2007