SINGAPORE – Singapore’s central bank this week delivered a sobering economic assessment amid sluggish near-term growth prospects, ongoing inflationary challenges and predictions the economy is already in a technical recession.
The Monetary Authority of Singapore (MAS) also emphasized that despite revising its 2023 headline inflation forecast downward, its battle against rising consumer prices is far from won.
The city-state’s trade-reliant economy faces mounting headwinds as external demand weakens amid a global economic slowdown.
Earlier this year, there were certain hopes that a post-pandemic economic rebound in China would lift Singapore above its tepid current growth forecast of between 0.5% to 2.5%.
Those hopes have since faltered as China’s economic recovery loses steam, with fewer and fewer independent economists predicting Beijing will hit its 5% economic growth target for 2023.
Singapore’s economy contracted in the first quarter, falling to -0.4% from the previous quarter’s growth of just 0.1%.
Economists believe that sluggish trade and industrial performance, driven partly by China’s faltering recovery, likely dragged Singapore into a technical recession in the second quarter, preliminary estimates for which are due later this month.
“The boost from China’s reopening has been limited and fallen short of expectations. It’s far from clear whether any boost is on the horizon, as China’s economic recovery is losing momentum,” said senior economists Chua Hak Bin and Brian Lee Shun Rong of Maybank Investment Banking Group in a research note reviewed by Asia Times.
In an annual review published on July 5, the MAS said that Singapore’s growth outlook will remain weak in the near term, with key growth engines such as manufacturing and financial services expected to “remain in the doldrums” as the global economy is expected to slow in the second half of 2023.
In comments accompanying the review’s release, MAS managing director Ravi Menon stated that growth in domestic-facing sectors is also expected to taper off as consumer demand slows due to higher interest rates and moderate wage increases.
Menon said Singapore’s 2023 gross domestic product (GDP) is set to slow “below-trend” within the official forecast range of 0.5% to 2.5%, down significantly from 3.6% in 2022. Inflation, while still above the historical average, has “clearly peaked and discernibly moderated” from recent 14-year highs, said Menon.
Imported inflation, he noted, has turned negative, reflecting the decline in global energy and food prices and the effects of a stronger Singapore dollar, which has risen in line with MAS’ aggressive monetary policy.
The MAS uses exchange rates, managed against a trade-weighted undisclosed basket of currencies from Singapore’s major trading partners, instead of interest rates as its primary policy tool to manage imported inflation.
It has enacted five rounds of monetary tightening since October 2021, causing the national dollar to appreciate by 8.3% and helping to curb imported cost pressures.
Core inflation, the central bank’s favored price measure which excludes private transport and accommodation, fell on a month-on-month seasonally adjusted annualized basis to 3.6% in May this year from a peak of 9.1% in June 2022, according to MAS data.
Year-on-year core inflation eased to 4.7% in May compared to 5% in March and April and 5.5% in January and February, official data showed. Headline inflation slowed year-on-year to 5.1% in May, down from 5.7% in April.
“Our progressive tightening of monetary policy has helped to arrest the momentum of price increases and facilitated a gradual decline in inflation,” said Menon.
“But the fight against inflation is not over and the monetary policy stance remains tight relative to the business cycle,” he added, noting that MAS has no intention of pivoting from “inflation-fighting mode” to “growth-supporting mode.”
With a more “benign” outlook for consumer prices, the central bank has lowered its headline, or all-items, inflation forecast for 2023 to a range of 4.5% to 5.5% from a previous estimate of 5.5% to 6.5%.
The full-year core inflation forecast remains unchanged at 3.5% to 4.5%, but is expected to moderate closer to 2.5% to 3.0% by the end of the year.
After refraining from a sixth round of policy tightening during a policy review in April, defying the forecasts of many economists, Menon said the MAS is “closely monitoring the evolving growth-inflation dynamics and [remaining] vigilant to risks on either side. We stand ready to adjust monetary policy as needed, especially if inflation momentum were to re-accelerate.”
Song Seng Wun, an independent economist formerly with CIMB Private Banking, told Asia Times that while energy and commodity prices have stabilized off their peaks “consumption on the services side is where inflationary pressure remains.”
“Despite the higher prices, people are still willing to pay because they’re gainfully employed and they still are quite confident about job security,” Song said.
Singapore’s labor market remains tight despite a recent uptick in retrenchments, with the overall unemployment rate standing at 1.8% in April, its lowest level since early 2015.
But with the rising likelihood that Singapore entered a technical recession in the second quarter, observers are split on whether falling export demand and declining industrial production will lead to a new round of layoffs.
The city-state’s non-oil domestic exports, seen as a barometer for external demand, contracted for an eighth consecutive month in May, dropping by 14.7%.
Exports of both electronics such as semiconductors and disk media products and non-electronics like specialized machinery, petrochemicals and pharmaceuticals registered steep declines.
Similarly, Singapore’s manufacturing output contracted for an eighth straight month in May, falling 10.8% year-on-year in the first double-digit contraction recorded since November 2019.
“We are likely to get another quarter of contraction. A technical recession remains highly likely,” said Song. “The drag from manufacturing and related industries will probably offset the service sector recovery. Despite that, labor market conditions here remain supportive and so consumer confidence remains quite resilient, although some businesses have trimmed.”
Maybank’s Chua and Lee expect the manufacturing downturn to persist in coming months amid weak external demand, which they note is “broad-based, although most evident in the prolonged global electronics slump.”
They predict Singapore’s second quarter GDP contracted by -0.8%, marking the first technical recession in the city-state since the two-month Covid-19 lockdown in 2020, which halted nearly all economic activity.
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