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US fiscal cliff deal offers S'pore 'temporary relief'

Publication Date : 04-01-2013

 

The "fiscal cliff" deal struck in the United States this week could boost Singapore's economy in the short term but it is not a permanent fix, say economists.

They believe the last-gasp agreement US legislators reached on January 1 could initially increase exports and capital inflows.

However, they warned that the deal was only partial and leaves room for fresh uncertainty in March when another planned round of negotiations over spending cuts is due.

The fiscal cliff refers to a US$600 billion double whammy of automatic tax hikes and deep spending cuts.

If no deal had been struck, these would have kicked in on January 1, likely tipping the world's biggest economy into recession, according to analysts.

The US compromise to kick the can down the road gives "a little breathing space" to Singapore's economy, said CIMB economist Song Seng Wun.

He said the deal buys some time for trade-dependent sectors such as electronics, which has been in the doldrums as of late.

Pointing to the "vulnerable state" of the local technology sector, Song said: "Without the agreement, it would have been worse for Singapore."

HSBC economist Leif Eskesen added that the fiscal cliff deal means "some uncertainty that held back consumption and investment in the US has been lifted", which will likely improve Singapore's exports to the US.

The US is one of Singapore's largest trading partners. It accounted for slightly over 8 per cent, or S$3.74 billion, of Singapore's non-oil domestic exports in the third quarter of last year.

But Eskesen said that a hurdle lies ahead in the form of another round of negotiations over spending cuts and raising the US debt ceiling.

The deal struck on January 1 dealt mostly with the tax issues associated with the fiscal cliff.

But US$100 billion in spending cuts were frozen for two months, pending further negotiations among legislators.

This means that more political battles will have to be fought in the US in the coming months, likely in March, which observers have called "March Madness".

This could have some impact on Singapore if consumers and firms in the US cut back on consumption and investment.

"The fiscal uncertainty which has weighed on longer-term investment decisions is set to persist. We believe this will weigh on growth as spending on durable goods and capital equipment is held back," said Schroders chief economist and strategist Keith Wade in a note.

Eskesen said that Singapore would probably have to wait until the second half of this year before its trade figures see any noticeable improvement.

"At that point, the US fiscal issues are hopefully behind us and there will be more stable conditions in Europe. But in the meantime, export growth could remain muted," he added.

The Singapore economy is expected to grow at a sluggish 1 to 3 per cent this year.

 

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