Monetary Authority of Singapore sees muddied economic outlook as main trading partners experience slowing growth, high inflation

SINGAPORE, Oct 28 — Major economies around the world will be buffeted by the double whammy of slowing growth and “multi-decade” high inflation in the coming months, muddying the economic outlook for Singapore as its main trading partners take a hit, the Monetary Authority of Singapore (MAS) said yesterday (October 27).

In its bi-annual macroecononomic review, MAS also said that global inflation is expected to reach 5.4 per cent for this year, the highest since 2008.

While this is expected to moderate to 3.2 per cent next year, there is a risk that the global economy will slip into a deep and protracted downturn, as risks of further disruptions to gas supplies in Europe may have knock-on effects on global energy prices, it added.

Meanwhile, significant tightening of global financial conditions and continued Covid-19 restrictions will continue to have an impact on economic growth in some of Singapore's major trading partners.

In sum, it said, global inflation and growth are expected to diverge further in the near term. This will in turn have an effect on the Singapore economy, which is expected to see growth of 3 to 4 per cent this year and moderate to a “below-trend” pace in 2023, MAS said.

MAS' review comes after it had earlier this month tightened monetary policy for the fifth time in 12 months to dampen “persistent” inflation here.

Slower growth, lower demand

The significant tightening of global financial conditions and continued Covid-19 restrictions in some countries are expected to weigh on growth in Singapore’s major trading partners, said MAS.

According to statistics by the Organisation for Economic Co-operation and Development, economies that are expected to see slower growth next year account for close to 30 per cent of Singapore’s gross domestic product.

These economies include the United States, the United Kingdom, the Eurozone, comprising the 19 member states of the European Union, and Malaysia.

“Dampened global and regional trade flows will adversely affect activity in Singapore’s manufacturing, wholesale, water transport and storage sectors, even as global supply frictions continue to ease,” said MAS.

Indeed, Singapore's manufacturing sector already weakened in the third quarter, shrinking by 3.2 per cent.

Notably, Singapore's electronics output fell by 13.3 per cent, mainly due to a contraction in the semiconductor segment.

At the same time, 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.

Dragged by a slowdown in trade, Singapore's economy is also expected to slow further next year.

“This represents a rebalancing of growth drivers from one that was predominantly led by trade in 2021,” said MAS.

“While growth in the economy should continue to be supported by expansions in the domestic-oriented and travel-related sectors, the pace of discretionary spending is likely to moderate as high inflation and the uncertain economic environment dampen consumer sentiment.”

Inflation continues to climb

MAS noted that global inflation hit its last record high in the third quarter of 2008, when headline inflation peaked at 6.5 per cent. At the time, the inflation rate was driven by a spike in energy prices, before collapsing in September that year when the global financial crisis began.

Recent numbers are not far off. This year, year-on-year headline inflation rose from 5.4 per cent in the second quarter, to 6 per cent in the third quarter.

“Supply frictions and a brisk recovery in demand, particularly for goods, have led to a rapid erosion of spare capacity and put significant upward pressure on costs and prices in many economies,” said MAS.

Looking forward, there remains a “high likelihood” that the Eurozone will dip into a technical recession, due to the impact of higher gas prices and general cost and price pressures faced by businesses and consumers.

“(The) Eurozone faltered significantly at the onset of the Russia-Ukraine war early this year and has since weakened further,” said MAS.

“Even with the recent stockpiling of natural gas, its availability may come under strain if the winter were colder than usual or if existing non-Russian gas flows to the Eurozone fail to replenish gas storages durably.”

In China, the economy is expected to continue to recover from the sequential contraction experienced in the second quarter, supported by the Chinese government’s commitment to increase infrastructure spending.

“However, the pace of expansion is likely to be weighed down by the continuation of strict pandemic control measures and the government’s pursuit of its aim of deleveraging the property sector,” said MAS.

The risk of the global economy slipping into a deeper and more protracted downturn is “substantial”, MAS noted.

“The Eurozone is vulnerable to further disruptions to gas supplies, which will impart strong knock-on effects on global energy prices,” said MAS.

“In Asia, a further depreciation of local currencies against the US dollar could intensify imported inflationary pressures given the prevalence of the dollar in international trade invoicing, with stronger effects for economies that are net importers of food and energy.”

In addition, should inflation turn out to be more entrenched and persistent than expected, or if labour market pressures fail to ease, then central banks may be compelled to adopt more restrictive policy settings, which would further drive up interest rates and curb global demand.

At the same time, persistently strong inflation would also lead to a larger erosion of real incomes and restrain private consumption.

“In this scenario, the US and Eurozone would be at risk of a deep and prolonged recession, with attendant spillovers to externally oriented Asian economies,” said MAS.

In a special feature included in the review, MAS said that it had carried out a study to examine how recent surges in global energy and agricultural product costs affected inflation across countries and sectors, eventually transmitting to domestic prices in Singapore.

The study found that recent shocks to global energy and agriculture costs could effectively explain just over two-thirds of Singapore's year-on-year core inflation in June, which had risen to 4.4 per cent from 3.6 per cent in May.

The study also found that the cost impact varies quite substantially across industries.

Singapore’s manufacturing and transport services sectors are heavily affected by energy cost shocks. In contrast, costlier agricultural products mainly affect food-related sectors such as food and beverage manufacturing and food and beverage services. ― TODAY