Economic View


All of us are affected by the current state of the economy in which we live in, and also by economies of key nations around the world irrespective of where we live.

The recent elections in Greece is a case in point. The Greek people elected a left-leaning, anti-austerity party which is planning to remove the tough austerity measures which the previous government had imposed under the directives of the European Central Bank and the International Monetary Fund. This is good for Greece but bad for the European Union. The Euro was already under pressure and it worsened after the results of the Greek elections were announced.

Singapore is a small open economy and so major changes in the top economies of the world impact it ever so often. With the huge drop in oil prices, the U.S. dollar has climbed up significantly and like every other currency, the SGD has depreciated significantly. Inflation is still present in the economy, but it is almost impossible to raise the interest rates because the U.S. wouldn’t.

So, interest rates would continue to be almost negative in Singapore, adjusted for inflation. A banking acquaintance asked me yesterday about my view on interest rates, and I was very clear: the U.S. Federal Reserve is unlikely to raise the interest rates even though the unemployment rate is falling in the U.S. as it does not see a wage growth. President Obama is trying to push the minimum wage rate in the U.S. but the Congress would not allow it. So, wages are not under pressure, so why would the Fed raise interest rates ? The banking friend was surprised with my argument, but I find it logical. Given that there will be no increase in the U.S. interest rates, it will not be possible for highly linked economies such as Hong Kong and Singapore to manipulate interest rates.

This means that real estate prices are unlikely to fall much further in Singapore this year. Likely rate increases would be towards end of 2015, and by that time the real estate market would have softened any way and people will be ready for an increased interest rate regime.

We can go on discussing along these lines like what economists do, but I think it would be critical for the average Joe amongst us to decipher the economic lingo and make sense of the current economic view of our learned economists. It is not difficult to do that though, as long as you keep yourself informed on the state of the world economy, which I do almost diligently.

All of us can do it, and so here is to another year of ultra low interest rates !

Cheers,

Vijay Srinivasan

31st January 2015

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