SINGAPORE – After narrowly avoiding a technical recession earlier this year, recent data shows better-than-expected but still sluggish growth in Singapore. But the city-state’s trade-reliant economy could decelerate for the remainder of this year and even into 2024 if the United States and Chinese economies underperform baseline forecasts, say analysts.
Gross domestic product (GDP) rose 0.7% year-on-year in the July to September quarter according to according to advance estimates recently published by the Ministry of Trade and Industry (MTI). On a quarter-on-quarter seasonally adjusted basis, the economy expanded by 1%, ahead of economists’ forecasts and faster than the tepid 0.1% growth in the preceding quarter.
In a policy statement on October 13, the Monetary Authority of Singapore, the city-state’s central bank, cited “muted” growth prospects in the near term and expectations of full-year growth to come in “at the lower half” of the official forecast range of 0.5% to 1.5%. It added that growth in Singapore’s major trading partners should gradually pick up by the second half of next year.
Analysts at research firm BMI Research were less optimistic of a 2024 rebound in a research note reviewed by Asia Times. The independent monitor issued a downward revision to Singapore’s full-year growth forecast to 0.8% from 1.1% and sees a further deceleration to 0.5% in 2024, owing to slowdowns expected among Singapore’s major trade partners and fiscal consolidation.
Singapore’s government is “constitutionally bound to run a balanced budget over its term which ends in 2025 and it has to make up for the large deficits it ran to support the economy through the pandemic. For another, the slowdowns we are expecting in the US and China means a weak recovery in exports growth… which will drag heavily on Singapore’s small and open economy,” BMI said.
The report added that private consumption is likely to hold up, with Singaporeans’ real disposable incomes supported by easing inflation and tight labor market conditions into next year. But businesses are likely to turn cautious with an export downturn, meaning that investment growth is forecast to remain “well below pre-pandemic levels.”
The city-state’s key non-oil domestic exports, which analysts regard as a barometer for external demand, contracted for the 12th consecutive month in September, falling by 13.2%, with both electronics and non-electronics charting a decline. Last month’s export decline was shallower than the 22.5% drop in August and 20.3% fall in July, official data showed.
“The softening global economy and weak manufacturing demand have already exerted a drag on the externally-oriented sectors in the Singapore economy. Any further deterioration in the geopolitical or economic landscape could add downside risks,” Selena Ling, chief economist at Oversea-Chinese Banking Corp in Singapore, told Asia Times.
Manufacturing, which accounts for one-fifth of the city-state’s GDP, contracted 5% on an annualized basis in the third quarter after a 7.7% decline in the prior quarter, which Ling remarked was less than expected. “Going forward, it may be more critical to see the services and construction sectors, which had been mitigating the external demand moderation, remain resilient,” she added.
Tan Wen Wei, Asia analyst at the Economist Intelligence Unit (EIU), sees external factors and new geopolitical uncertainties posing risks to Singapore’s growth in the fourth quarter and into 2024, noting that the city-state has already been impacted by weak domestic demand in China due to its property sector slump and subdued export performance.
Pointing to uncertainty surrounding Israel’s expected military operation in Gaza, Tan said the main economic impact stemming from the conflict would come from higher imported energy costs. “Though oil prices had increased after this incident, a sharper escalation that involves Iran will cause more disruption to oil production and supply chains and will drive oil prices even higher,” he said.
Higher oil prices would, in turn, push up energy costs and inflation in Singapore at a time when domestic consumers and businesses will face a Goods and Services Tax (GST) hike in January 2024 from 8% to 9% and other scheduled price hikes including for public transport and water. “Higher inflation will pose a drag to private consumption and growth as a result,” Tan told Asia Times.
The MAS kept its exchange rate-based monetary policy unchanged in its October 13 policy statement, noting that that core inflation, the central bank’s favored consumer price gauge which excludes private transport and accommodation costs to better reflect household expenses, has slowed and is projected to broadly decline over the course of next year.
Core inflation has eased from a 14-year high of 5.5% in January and February to 3.4% in August, marking a third consecutive monthly decline. The MAS does not have an explicit inflation target, though the central bank maintains that, on average, a core inflation rate of just under 2%, which is close to its historical mean, is consistent with overall price stability in the economy.
The MAS uses the exchange rate of the Singapore dollar weighed against a basket of currencies of the city-state’s major trading partners, rather than interest rates, as its main policy tool to manage inflation. It has maintained the prevailing rate of currency appreciation since April this year after five consecutive rounds of tightening between October 2021 and 2022.
“Elevated inflation remains the key impediment to looser policy. But with core inflation set to fall close to target soon, we don’t think such a move is far off. Despite some upside risks from higher fuel and utility prices, supply-side factors overall point to more disinflation ahead,” said Alex Holmes, a lead economist at Oxford Economics.
“We think most analysts are underestimating how soon the MAS will move once it is able,” Holmes added. “Given that by early next year core inflation is set to close in on 2% and the economic backdrop will likely still be downbeat, we think the MAS will begin loosening policy, probably by reducing the slope of the policy band in January.”
The central bank also announced that it would increase the frequency of its policy decisions to a quarterly basis in 2024. Currently, it does so on a half-yearly schedule, with statements issued in April and October. Observers say the move will afford the MAS more flexibility to communicate and adapt to volatile macroeconomic conditions than previously.
Inflationary conditions had compelled the central bank to make off-cycle adjustments twice in the last two years. Switching to a monetary policy review synchronized with quarterly advance growth estimates would therefore allow the MAS “to respond more nimbly to uncertainties surrounding growth and inflation, amid a more volatile geopolitical backdrop,” the EIU’s Tan told Asia Times.
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