Macroeconomic Reviews
Published Date: 26 April 2023

Macroeconomic Review Volume XXII Issue 1, Apr 2023

  • Following a firm start to 2023, global economic activity is expected to slow markedly over the coming quarters, as the full impact of the rapid and simultaneous tightening in global monetary policy over the past year filters through to the real economy. The boost from economic reopening and pent-up consumer demand is also set to wane.
  • Against this backdrop, GDP growth in most of Singapore’s trading partners is expected to be below trend or even negative, in the coming quarters. China will be a notable exception as its economy experiences a strong post-reopening rebound, but this will be mainly driven by less import-intensive consumer services, which could limit the benefits for the rest of the region.
  • Meanwhile, global headline inflation is projected to moderate to 3.8% in 2023 from 5.3% last year, but it will still be above pre-pandemic norms. While the disinflation trend in the goods components of national CPIs is expected to resume after a pause early in the year, the moderation in services inflation is likely to lag as the acute labour market imbalances will take several more quarters to be resolved.
  • The rise in global interest rates has surfaced latent vulnerabilities within the financial system, and their recent manifestation in bank failures present risks to global financial stability and the growth outlook. For now, the swift and proactive response by policymakers to emerging vulnerabilities has been sufficient in preventing further downside risks from being built into the baseline.

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  • The Singapore economy slowed discernibly in Q4 2022 and into the first quarter of this year, weighed down by its trade-related activities amid the global manufacturing and trade downturn. However, the domestic-oriented sectors have remained generally firm thus far, as the poorer performing trade-related sectors have limited spillovers given their relatively low inter-dependence with the rest of the economy. In addition, strong wage and consumption growth, as well as the ongoing recovery in tourism inflows, have lent support to the consumer-facing activities.
  • A broadening downturn in the global electronics industry and the recent banking stresses in the US and Europe have dampened Singapore’s growth prospects, given its relatively large exposure to the tech and finance sectors. Singapore’s GDP growth for 2023 is expected to come in at 0.5% to 2.5%, a step down from 3.6% in 2022. The near-term outlook remains uncertain and fragile, with risks to growth skewed to the downside. Should other latent vulnerabilities in the global financial system manifest in the coming months, consumer and investor confidence will take a further hit, with wider adverse implications for the economy beyond the current manufacturing-led downturn.
  • This chapter also analyses the impact of geoeconomic fragmentation on global trade flows, focusing on the electronics industry. The study finds evidence of trade diversification and reconfigurations in supply chains through alternative production nodes, even as Asia has retained its dominance in global electronics exports. Recent investment flows also point to greater insourcing among the major countries, which could reduce their import intensity and dampen trade flows over the longer term.

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  • Total employment growth moderated in Q4 2022. Although employment gains in the domestic-oriented sector continued to rise, the expansion of the workforce in the external-facing sectors slowed amid global economic headwinds.
  • There are early indications that the degree of labour market tightness has begun to ease, with a decline in the number of job vacancies and a slight pickup in retrenchments. However, with the resident unemployment rate remaining below the pre-COVID average, nominal wage growth remained firm in Q4 2022, although the pace of increase is moderating.
  • Weaker growth and tighter financial conditions are expected to dampen employment growth in the trade-related and modern services clusters in the quarters ahead. However, returning tourist arrivals and the ramp up in public infrastructure projects should support labour demand in the travel-related, domestic-oriented and construction sectors. Overall, despite weakening employment prospects in the external-facing sectors, the labour market is expected to remain at full employment conditions over the year, against its tight starting point.
  • Resident wage growth is expected to ease further in the quarters ahead but stay above its historical average. Although wage growth will moderate in the external-facing sectors, it will remain firm in the travel-related and domestic-oriented clusters. Policies to uplift wages for lower-income resident workers will also boost overall wage growth.
  • MAS Core Inflation rose to 5.4% y-o-y in Q1 2023, from 5.1% in Q4 2022, on account of the GST hike as well as firm business cost pressures amid tight domestic labour market conditions. Abstracting from the GST increase, various measures of core inflation indicate that the underlying pace of price increases in the economy has moderated. This reflected the early effects of declining imported inflation as well as slowing consumer demand. Meanwhile, CPI-All Items inflation slowed to 6.1% from 6.6% over the same period, as the fall in private transport inflation more than offset the increase in core and accommodation inflation.
  • Core inflation will stay elevated in the next few months, as firms, especially those in the consumer services sectors, continue to pass on accumulated cost increases. However, core inflation is expected to slow more discernibly in H2 2023 and end the year materially lower. Barring fresh shocks to global supply, the further decline in Singapore’s imported inflation alongside lower commodity prices and the stronger S$NEER will continue to dampen externally driven inflation. Meanwhile, the cyclical easing of the pace of wage increases in Singapore will temper cost pressures and moderate domestic sources of inflation. For 2023 as a whole, MAS Core Inflation and CPI-All Items inflation are projected to average 3.5–4.5% and 5.5–6.5%, respectively. Excluding the effects of the GST hike, core and headline inflation are forecast to be lower at 2.5–3.5% and 4.5–5.5% respectively.

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  • In October 2022, MAS re-centred the mid-point of the S$NEER policy band up to the then-prevailing level of the trade-weighted exchange rate (which was near the top of the band). There was no change to the slope and width of the band. This was MAS’ fifth consecutive policy tightening move in 12 months. While Singapore’s GDP growth was expected to come in below trend in 2023, MAS Core Inflation had come in higher than expected in the prior months, and its near-term momentum was expected to still be firm. Upside risks to inflation remained. MAS had therefore assessed that, on balance, a further tightening of monetary policy was needed to ensure that price pressures were dampened over the next few quarters.
  • In April 2023, MAS maintained the prevailing rate of appreciation of the S$NEER policy band, with no change to its width and the level at which it was centred. The momentum of MAS Core Inflation has slowed decisively while downside risks to Singapore’s GDP growth have increased. Although core inflation will remain elevated in the near term, it is expected to ease more discernibly in y-o-y terms in H2 2023, reflecting declining import prices and easing domestic wage pressures. The effects of MAS’ five most recent monetary policy tightening moves will continue to filter through to the economy and dampen inflation further. As core inflation is expected to end the year significantly lower, MAS assessed that the prevailing monetary policy stance is sufficiently tight and appropriate for securing medium-term price stability.
  • Amid slowing economic growth and still-high inflation, Budget 2023 sought to address cost-of-living and cashflow concerns among vulnerable households and firms. There were also structural measures to address Singapore’s economic competitiveness and demographic challenges, while strengthening the social compact and building a more inclusive and resilient society. The Budget was carefully calibrated to provide the appropriate fiscal stimulus amid elevated inflation conditions. Overall, macroeconomic policy in Singapore will help ensure medium-term price stability and sustainable growth in the economy.

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