The Macroeconomic Review provides an assessment of Singapore’s economic developments which formed the basis for MAS’ monetary policy decision in April 2022.
Published Date: 28 October 2021
Macroeconomic Review Volume XX Issue 2, Oct 2021
- The global recovery suffered a setback in Q2 and Q3 2021, weighed down by fresh waves of COVID-19 infections. The slowdown was more pronounced in Asia ex-Japan, where vaccination rates were generally lower and public health measures have been more stringent. Growth was firmer in the major advanced economies, as vaccinations have weakened the linkage between infections and economic activity.
- The turnaround in global aggregate demand, alongside the pandemic-related shift in consumption from services to goods, has interacted with various frictions affecting supply chains to drive a sharp rise in the prices of several important primary and intermediate inputs, including oil, metals, and semiconductors. The pass-through to consumer price inflation has in general been stronger in those economies where the demand recovery has been more rapid and complete.
- Global growth is projected to slow to 4.8% in 2022 from 5.6% in 2021 as the recovery in the major advanced economies matures and policy support is gradually withdrawn. Activity in the ASEAN economies is expected to pick up from Q4 as the region recovers from the more severe economic impact of the pandemic experienced this year.
- In the baseline, the current global price impulse should subside as disruptions affecting supply are progressively addressed. There is a risk that supply problems could prove more intractable, resulting in stronger and more persistent inflationary pressures than expected even as growth slows. However, residual labour market slack and well-anchored inflation expectations decrease the likelihood of price rises becoming entrenched.
- Singapore’s economic recovery stalled over the last two quarters amid a resurgence in COVID-19 infections in the community. GDP contracted by 1.4% q-o-q SA in Q2 2021, before turning in marginal growth of 0.8% in Q3. Domestic-oriented activity was curtailed by mobility restrictions to slow the transmission of the virus, while the external-facing trade-related and modern services sectors fared better and provided some support to overall growth. As at Q3 this year, output in the economy had returned to its pre-pandemic level on aggregate, although there remained significant disparities in performance across industries.
- The economy is expected to continue on its expansion path in the coming quarters as movement restrictions are progressively eased in line with the government’s reopening plans. The domestic-oriented sector should see a gradual pickup in activity, while prospects for the travel-related sector have also improved slightly even though its recovery is likely to be protracted. Meanwhile, the trade-related and modern services clusters will be supported by recoveries in major trade partners and continued strength in global electronics demand. Growth in the Singapore economy is expected to come in at 6–7% in 2021, and register a slower but still-above trend pace in 2022, barring the materialisation of downside risks arising from the evolution of the virus or global economic developments.
- Singapore’s merchandise trade flows have held up relatively well amid global supply chain disruptions wrought by the pandemic. Electronics exports in particular have been a source of strength since last year. The relatively upstream nature of Singapore’s production, such as of semiconductors, is an important reason why domestic manufacturers are less affected by supply bottlenecks. Sources of imports of intermediate and consumption goods are also generally well-diversified, thus ensuring the resilience of domestic supply against external shocks.
- The labour market recovery remains broadly on track, even as the heightened alert measures had some temporary dampening effects on the domestic-oriented sector in Q2 2021. Total employment contracted by 19,900 in the quarter, although resident employment continued to expand, albeit at a slower pace relative to Q1. However, non-resident employment declined at a faster pace due to tightened travel restrictions.
- While labour demand was weak in travel-related and consumer-facing segments, it rose strongly in most other sectors. Exacerbated by tight constraints in non-resident worker supply, manpower shortages have intensified in construction and manufacturing, and emerged in modern services and health & social services. Pockets of labour market tightness have contributed to rising wage pressures in aggregate, although higher wage growth thus far has largely reflected normalisation and base effects.
- For the rest of the year, resident employment should continue to expand alongside the economic recovery. In 2022, demand for resident and non-resident workers will rise as the economy expands at an above-trend pace. As labour market slack dissipates, wages are anticipated to strengthen over time.
- Core inflation rose to 1.1% y-o-y in Q3, from 0.7% in Q2. The step-up was mainly driven by the increase in electricity & gas costs, reflecting higher global oil prices. Labour cost increases also appear to have filtered through to consumer prices for some services such as food and domestic & household work. Reflecting higher core and accommodation inflation, CPI-All Items inflation edged up to 2.5% y-o-y in Q3, from 2.3% in Q2, even as private transport inflation moderated. Headline inflation is expected to come in at around 2% this year, while core inflation is projected to come in near the upper end of the 0–1% forecast range.
- Underlying inflation in the Singapore economy is expected to pick up further next year on the back of stronger domestic sources of inflation, including some administrative price revisions. Higher business costs, alongside recovering private consumption, will support the pickup in services inflation. Overall import price pressures could also persist into 2022 as global supply bottlenecks take time to ease. These factors are likely to dominate and underpin the rise in core inflation even if concerns over virus transmission lead to some near-term weakness in consumption. All in, MAS Core Inflation is forecast to rise to between 1–2% while CPI-All Items inflation is projected to average between 1.5–2.5% next year.
- In October 2021, MAS raised the slope of the S$NEER policy band slightly. Restoring an appreciation path for the exchange rate was appropriate against the underlying pressures on inflation. Import price increases are likely to continue for some time, while business costs in the Singapore economy should firm as the negative output gap closes in 2022.
- Fiscal policy continued to provide the necessary support to the economy as the COVID-19 pandemic evolved. Amid disruptions to economic activity caused by several waves of the more contagious Delta variant, quick and targeted fiscal assistance was rendered to businesses and individuals that were hard-hit by the tightened safe management measures.
- All in, fiscal and monetary policies continue to work in tandem to mitigate the economic impact of the pandemic and secure medium-term price stability.