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: 27 October 2022
Macroeconomic Review Volume XXI Issue 2, Oct 2022
- Global growth and inflation dynamics have worsened over recent months. CPI inflation came in significantly higher than expected in many economies, as supply frictions, alongside the recovery in domestic demand, continued to put significant upward pressure on costs and prices.
- Sustained inflation momentum, particularly in the AEs, has led central banks to continue hiking interest rates even though economic activity has started to plateau or slow. Concomitantly, China’s growth has been restrained amid the ongoing correction in the real estate sector. There is thus some synchroneity emerging in the global economic cycle, with the slowdown in the US, Eurozone and China economies spilling over to some export-dependent Asian economies.
- The global economy has entered a precarious “disequilibrium phase”, characterised by a growing divergence in growth and inflation outcomes. This will continue for at least several quarters, with global GDP growth moderating sharply and remaining below trend, and inflation staying elevated before easing in the latter part of 2023. The US economy could still avoid a sharp full year recession.
- A more adverse growth and inflation scenario in 2023 is a growing risk. Notably, inflation could remain elevated for longer leading to even higher interest rates and a subsequent sharper retraction in economic activity. In addition, the pullback in household and business spending, together with a further tightening in financial conditions, could interact with existing vulnerabilities in the financial system. This would exacerbate the economic downturn and potentially lead to disruptive capital outflows across many EMs.
- The Singapore economy expanded modestly in Q3 2022, supported in part by industries which continued to benefit from the reopening of borders. At the same time, there are signs of underlying weakness in the key external-facing sectors, with the manufacturing and financial sectors underperforming prior expectations.
- Amid weakening external demand prospects, the global electronics cycle is on the brink of a downturn. Global chip sales began to contract in early Q3, even as inventory continued to grow. Consumer demand for electronic devices in Singapore’s top two final-demand markets, China and the US, has contracted, adversely impacting Singapore’s electronics exports in recent months. Apart from slower demand, the domestic semiconductor industry is also grappling with soaring energy costs. Meanwhile, the recovery in the travel-related and consumer-facing sectors should continue in the near term, but their growth momentum will ease as pent-up demand from economic reopening dissipates.
- GDP growth is estimated to come in at 3–4% in 2022, and moderate to a below-trend pace in 2023. Compared to the trade-driven growth in 2021, there has been a rebalancing of growth drivers this year with broad-based contributions from the trade-related, modern services, domestic-oriented and travel-related clusters. As external demand continues to slow, the trade-related sectors could pose a drag on growth in 2023.
- This chapter also reports on a firm-level analysis of the economy’s underlying financial resilience, which is found to be robust for the majority of firms included in the study. However, productivity performance and spending on R&D vary significantly across businesses and sectors.
- Total employment growth picked up further in Q2 2022, mainly driven by stronger non-resident employment gains. The near-complete removal of border restrictions in April allowed firms to ramp up hiring of non-resident workers, especially in the construction sector. Meanwhile, resident employment expanded at a similar rate as in Q1. Overall, the labour market remained tight in Q2, and the resident unemployment rate dipped to 2.8% in June. Resident wage growth stayed strong at 6.8% y-o-y, but the momentum of wage increase slowed compared to the previous quarter.
- For the rest of 2022 and into 2023, continued robust inflows of non-resident workers should steadily alleviate excessive labour market tightness. Overall labour demand is expected to stay supported. The ongoing recovery in tourism and business-related travel, along with resilient domestic consumption, should support employment growth in the domestic-oriented and travel-related sectors. While weakening global demand conditions could lead to some pullback in hiring, the aggregate employment impact should be contained, with the adjustment largely taken up through a fall in job vacancies and a moderation of wage pressures.
- Core inflation accelerated to 5.1% y-o-y in Q3, from 3.8% in the previous quarter, as price pressures picked up across all broad categories of the core CPI basket. Accumulating upstream costs passed through to discretionary goods & services inflation amid firm demand conditions, while earlier spikes in global commodity prices led to higher electricity & gas and non-cooked food inflation.
- In the remaining months of 2022, energy-related inflation should moderate as global crude oil prices have eased from the peak seen earlier this year. However, as demand conditions remain conducive, discretionary goods and services inflation should rise further, reflecting the continued response to increased costs. On a y-o-y basis, core inflation will stay elevated and average slightly above 5% for the rest of the year. For 2022 as a whole, core and headline inflation are projected to come in around 4% and around 6%, respectively.
- In 2023, imported inflation is expected to remain significant across a range of intermediate and final goods. Commodity prices have come off their peaks but will remain elevated, while higher costs in Singapore’s major trading partners—including from tight labour markets—will continue to flow through global value chains. Domestically, the labour market is likely to stay tight. Unit labour cost, especially for services, will rise further in 2023, albeit at a slower pace than this year. Firms are projected to continue raising prices to rebuild profit margins eroded by increases in import, labour and other business costs, keeping underlying inflation above-trend in the year ahead.
Core inflation will step up temporarily amid the one-off increase in prices to a higher level following the GST hike in January 2023. It is forecast to remain high in H1 next year before slowing more discernibly in H2, as cost pressures ease and demand conditions moderate. For the full year, MAS Core Inflation should come in at 3.5–4.5% and CPI-All Items inflation at 5.5–6.5%. Excluding the effects of the GST increase, core inflation should ease to an average of 2.5–3.5% in 2023, and headline inflation to 4.5–5.5%. Nevertheless, there remain upside risks to these forecasts.
- In April, the outlook for inflation was raised, due to commodity price spikes following the outbreak of the Russia-Ukraine war and the boost to demand from the easing of domestic COVID restrictions. MAS shifted two parameters of the S$NEER policy band, re-centring up the mid-point of the band and increasing its slope slightly. In July, MAS re-centred the S$NEER policy band upwards once more while keeping the slope unchanged. Business costs were accumulating rapidly amid strong external price pressures and a tight domestic labour market, and their pass-through to consumer prices had lifted the profile of MAS Core Inflation for the rest of 2022. Risks to inflation were also tilted towards the upside. Even as growth momentum was slowing, the Singapore economy remained on track to expand at an above-trend pace this year. On balance, MAS assessed that a further re-centring up of the policy band would be prudent so as to lean against price pressures becoming more persistent.
- In October, MAS undertook its third consecutive re-centring of the policy band in six months. The mid-point was raised to a level close to the top of the previous policy band. Core inflation is expected to remain elevated through the first half of 2023, as higher costs along global and domestic value chains continue to be passed through to final consumer prices in Singapore. It is expected to ease more discernibly in the second half of next year, although risks remain tilted to the upside. While global growth prospects have deteriorated, MAS assessed that a tightening of monetary policy was appropriate to help dampen price pressures in the immediate quarters ahead, when inflation is likely to peak. This would help ensure medium-term price stability as a basis for sustainable growth in the economy.
- Fiscal policy stepped up support for small businesses and households in light of rising costs. The support for vulnerable households in particular has been progressively enhanced in line with the stronger-than-expected inflation outturns. Nevertheless, fiscal measures have been calibrated so as to avoid both stoking further inflationary pressures in the economy and distorting important relative price signals. Overall, macroeconomic policy in Singapore will help ensure medium-term price stability and sustainable growth in the economy.