Macroeconomic Review Volume XXI Issue 1, Apr 2022
- The global economic recovery from the pandemic broadened in Q4 2021, with the momentum carrying forward into early 2022. Recurring COVID-19 infection waves have had a significantly weaker impact on economic activity, as rising vaccination rates have facilitated transitions to an endemic phase of the virus in many jurisdictions. The pent-up demand released has been reinforced by the flow-through of previous policy support.
- A pickup in inflation has accompanied the rebound in spending and production activity in many economies since mid-2021. Higher inflation has partly reflected inelastic short-term supply arising from production bottlenecks and frictions. However, tightening labour markets and rising core inflation in some economies suggest a broader inflationary process is taking hold.
- The outbreak of the Russia-Ukraine conflict in February added a further powerful impulse to inflation via steep increases in a range of commodity prices, including energy and grains, reflecting both countries’ important roles in the world supply of these products.
- Global inflation is expected to reach 4.0% in 2022, the highest rate since 2008, but should ease to 2.2% in 2023 as supply challenges are addressed and major central banks withdraw policy accommodation. Conversely, global growth is projected to ease to 3.9% in 2022 from 5.4% in 2021 as the post-pandemic recovery matures and the price shock squeezes real incomes, although elevated savings offer some buffer to demand. Inflation in Asia ex-Japan is expected to be weaker through this cycle, as the region’s persistent negative output gaps will dampen wage and price growth.
- Considerable uncertainty surrounds the outlook. A key risk is that the current upsurge in inflation could become embedded in price and wage settings, worsening the output sacrifice required to restore price stability. The pandemic and the Russia-Ukraine conflict could impose further shocks on supply chains and prices, increasing the risk of a de-anchoring of inflation expectations. Higher corporate and sovereign debt levels in many countries imply heightened financial vulnerabilities that could be tested as monetary conditions tighten.
- The performance of the Singapore economy in Q1 2022 came in within expectations, growing by a modest 0.4% q-o-q SA, compared to the 2.3% expansion in Q4 2021. The trade-related and modern services clusters, which posted strong outturns in Q4 2021, contracted sequentially in Q1 2022. In comparison, the domestic-oriented cluster saw a broad-based expansion. Within the travel-related cluster, performance was uneven, with gains in the air transport and arts, entertainment & recreation (AER) sectors partially offset by a sharp pullback in the accommodation sector.
- Supply shocks arising from the Russia-Ukraine conflict have introduced renewed uncertainties surrounding the outlook for the rest of the year, at a time when global supply chain frictions arising from the pandemic have yet to be fully resolved. Supply-driven price shocks are eroding real incomes and could lead to an aggregate demand shock. A static analysis of global trade and input-output linkages suggests that Singapore’s direct and indirect exposures to Russia through the income and production channels are relatively small. However, the impact could be amplified by confidence effects arising from higher inflation, tighter financial conditions, and heightened uncertainty, which would restrain domestic consumption and investment.
- Meanwhile, Singapore took a major step towards living with COVID-19 by easing domestic safe management measures and border restrictions substantially at the end of March. Reduced restrictions will bring forward the projected recovery in the domestic-oriented and travel-related sectors to Q2, earlier than the previous expectation of the second half of this year. However, external-oriented sectors such as manufacturing, wholesale trade, water transport and financial services could face some headwinds amid the less optimistic global economic outlook. Barring further escalation in the Russia-Ukraine conflict or a severe setback to the improving trajectory of the pandemic, the Singapore economy remains on track to grow by 3–5% in 2022, its second year of above-trend growth.
- From a longer-term perspective, the restructuring of the Singapore economy has yielded greater productivity gains in the tradable sector over the past decade, with higher returns accruing to capital owners and specific segments of skilled labour. Consequently, the gap between wages in the tradable and non-tradable sectors has persisted over time. The next phase in Singapore’s restructuring journey is likely to see this divergence narrow, as market forces and government policies, that incentivise investments in productivity-enhancing technologies and processes, for example, facilitate the adjustments. Lower- and middle-income households are likely to benefit most from this transition.
- Total employment rebounded in Q4 2021 as non-resident employment rose for the first time in two years and resident employment grew at a faster pace. The expansion in non-resident employment was led by hiring in construction, although most sectors saw some increases in non-resident headcount. Meanwhile, resident employment continued to register robust growth, driven by the modern services as well as consumer-facing industries. Consequently, the labour market tightened further. The resident unemployment rate continued to edge down, returning to pre-COVID levels by February this year.
- A significant relaxation of border controls in April should lead to increased inflows of non-resident workers, further alleviating manpower shortages. Meanwhile, resident employment growth should continue to rise, albeit at a slower pace, as resident labour supply is largely utilised. Amid the overall tight labour market, as well as policies to boost wages of low-wage resident workers, nominal wage growth is anticipated to pick up.
- Consumer price pressures continued to intensify in Q1 2022, with stronger inflation seen across all broad CPI categories. Higher oil and imported food prices at the turn of the year led to a pickup in electricity & gas and non-cooked food inflation, while accumulating business costs passed through to greater services price increases. Meanwhile, the faster rate of increase in private transport and accommodation costs led to a larger rise in headline inflation vis-à-vis core inflation.
- The Russia-Ukraine conflict that erupted in end-February has exacerbated ongoing pandemic-induced disruptions to global supply chains and will add further to global price pressures. International oil and food commodity prices have stepped up sharply and are expected to remain firm for a sustained period. These will keep domestic electricity & gas, fuel and food inflation elevated over the year. At the same time, tight domestic labour market conditions are leading to higher unit labour cost.
- Consequently, MAS Core Inflation is expected to continue rising in the near term. It should moderate towards the end of the year as external inflationary pressures ease alongside a partial resolution of global supply constraints. Nevertheless, underlying inflation will remain above its historical level, as businesses pass on higher operating costs amid firm demand. All in, the forecast ranges for MAS Core Inflation and CPI-All Items inflation have been revised up to 2.5–3.5% and 4.5–5.5%, respectively. The larger 2% points revision in the forecast range for headline inflation reflects recent strong outturns in COE premiums for cars as well as higher fuel costs.
- In January 2022, MAS raised the S$NEER policy band’s rate of appreciation slightly, while maintaining the width and the level at which it was centred. MAS had already begun withdrawing policy accommodation in October 2021 but assessed that a further tightening in an off-cycle move was necessary to dampen rising core inflationary pressures. Higher global oil and food prices, as well as firm wage growth domestically, were fuelling a rapid accumulation in business costs which would pass through to consumer price inflation.
- In April 2022, MAS tightened monetary policy further by re-centring the mid-point of the S$NEER policy band upwards and increasing the band’s slope slightly. This monetary policy stance was assessed to be appropriate for dampening imported inflation in the face of fresh shocks to global prices and would help maintain medium-term price stability. While the global economy would expand by less than previously anticipated, Singapore was still expected to record a second consecutive year of above-trend growth and the output gap would turn slightly positive.
- Budget 2022 was introduced at a time when cyclical strains had eased considerably but rising inflation and structural changes were confronting the economy. As such, the Budget provided targeted and scaled-down support to help businesses and households cope with near-term cyclical challenges, even as it introduced and enhanced measures to spur digitalisation and productivity, uplift lower-wage workers and tackle climate change. At the same time, significant changes were made to the tax system to improve its progressivity and secure government finances for the future.
- All in, fiscal and monetary policies have been adjusted to reflect the recovery in the Singapore economy and mitigate the impact of external inflationary shocks. The overall macroeconomic policy stance will facilitate Singapore’s transition towards living with COVID-19 and ensure sustainable economic growth.
Box A: Revisiting the 1970s Inflation Shocks (142.2 KB)
Special Feature A: Invoicing Currency in Singapore’s Merchandise Imports
Special Feature B: Macroeconomic Modelling at MAS
Special Feature C: The Roles of Central Banks — Evolution, or Demand and Supply?
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