The Macroeconomic Review provides an assessment of Singapore’s economic developments which formed the basis for MAS’ monetary policy decision in October 2022
Published Date: 28 April 2021
Macroeconomic Review Volume XX Issue 1, Apr 2021
- The global recovery was set back in Q4 2020 and Q1 this year, due to a resurgence in COVID-19 infections and the attendant disruption in economic activity. The strong and synchronous global rebound observed in Q3 2020 has given way to greater cross-country divergence in growth.
- However, the recovery momentum should be regained over the rest of 2021 as substantial policy stimulus flows through and vaccination programmes allow the progressive reopening of borders. Business and consumer sentiment surveys have signalled strong confidence in the year ahead, while trade and manufacturing activity is strengthening further. The global economy is projected to reach its end-2019 level of output by Q2 2021 and expand by 6.2% for the year as a whole.
- While the central projections for the growth outlook have improved, the pandemic continues to present significant uncertainties to the global economy’s path to normalisation. At the same time, the possibility of a quicker recovery has tilted the balance of risks towards an earlier and stronger pickup in prices. However, the considerable degree of economic slack remaining would cap the extent of the upsides to inflation.
- The Singapore economy expanded by 3.8% q-o-q SA in Q4 2020, easing from 9.0% in Q3. The deceleration was due to a decline in manufacturing output, and growth normalisation in the consumer-facing industries after the post-circuit breaker rebound. In the first quarter of this year, overall GDP growth moderated further to 2.0% q-o-q SA, but the slowdown was less pronounced than anticipated. Overall, the economy was close to recouping the output lost from Q4 2019 to the trough of Q2 2020. However, sectors worst-hit by the crisis, especially the travel-related industries, remained substantially below pre-pandemic levels.
- The outlook for the Singapore economy has improved amid strengthening external demand. GDP growth in 2021 is projected to exceed the upper end of the official 4–6% forecast range, barring a significant setback in activity from a weaker recovery of the global economy or surge in locally transmitted cases. However, growth outcomes will remain disparate across sectors. While the prospects for sectors less affected by the pandemic, especially manufacturing, have brightened, the prognosis for the worst-hit sectors is weak, as an early, widespread reopening of international borders remains unlikely.
- There are both upside and downside risks to the baseline outlook. A stronger-than-expected upturn of the global electronics cycle could further boost growth, but the recovery could also be derailed if vaccination schemes turn out to be less effective than expected, leading to recurrent and widespread virus outbreaks around the world.
- The COVID-19 pandemic can have a longer-term impact through the impairment of labour & capital accumulation. Government initiatives have alleviated the adverse impact on the resident workforce in Singapore, while the resilience of business investment during the pandemic bodes well for productivity gains in the medium term.
- Labour market conditions continued to improve in Q4 2020. Overall employment contracted at a slower pace, while resident employment exceeded its pre-COVID level as most sectors expanded their local headcount in Q4. Foreign employment, however, saw persistent declines across most sectors, largely reflecting uncertainties in the outlook and difficulties faced by firms in replacing outgoing foreigners due to COVID-related travel restrictions globally.
- In line with the gradual recovery in economic activity, labour demand is expected to continue to recover in 2021, with most of the job gains accruing to residents. The resident unemployment rate should therefore decline steadily throughout the year. However, some lingering slack could persist due to labour market mismatch and underemployment. Labour cost pressures should also be contained as productivity is projected to step up this year.
- MAS Core and CPI-All Items inflation turned mildly positive in Q1 2021. Most of the increase in core inflation reflected the dissipation of the effects of government subsidies introduced in Q1 last year, as well as higher imputed costs of travel-related components. At the same time, price increases across most goods and other services in the core CPI basket stayed low. Headline inflation picked up more strongly, on account of higher private transport inflation as the recovery in global oil prices passed through to petrol prices. Firm demand for cars also drove up COE premiums.
- Underlying inflation is anticipated to pick up gradually this year in tandem with the upturn in external inflation and stronger domestic demand. The step-up in y-o-y inflation in the coming months will, however, largely reflect base effects as prices fell in Q2 last year. The pace of increase in inflation should ease in the latter part of this year as these base effects fade and global commodity prices rise at a more modest pace. While domestic price pressures are expected to pick up and broaden, underlying inflation in the economy is unlikely to accelerate amid the lingering slack in the economy. Effective factor cost increases should remain low, while competitive pressures and the lack of tourism demand will continue to weigh on some retail and services components. For the year as a whole, inflation for most core CPI components is forecast to stay below 1.5%. MAS Core Inflation is expected to come in between 0–1% while the forecast range for CPI-All Items inflation has been revised up to 0.5–1.5%.
- In April 2021, MAS maintained the zero per cent p.a. rate of appreciation of the S$NEER policy band. An accommodative monetary policy stance remained appropriate as core inflation would stay low. With the narrowing of the negative output gap, core inflation was expected to rise gradually from its current subdued levels but still keep below its historical average. While overall GDP growth will come in at an above-trend pace this year, the sectors worst hit by the crisis will continue to face significant demand shortfalls.
- Budget 2021 was expansionary, extending and building upon the unprecedented fiscal support of the previous year. There was further targeted assistance provided to vulnerable sectors and households amid the continuing drag from the pandemic. The Budget measures also focused on strengthening the resilience of the economy and provided impetus to its structural transformation.
- Taken together, the complementary monetary and fiscal policies this year will help entrench the ongoing recovery, while ensuring price stability and sustainable growth in the medium term.