Post-Covid economic recovery is already losing steam as Prime Minister Lee warns of ‘more storms and turbulence’ to come
By NILE BOWIE
SINGAPORE – Consumer prices in Singapore are at a 13-year high and are projected to rise higher as the notoriously pricey city-state, a bellwether for global economic growth trends, grapples with imported inflation, heightened geopolitical risks and fears its major trading partners are slowing down or headed for recession.
Since easing most pandemic-related restrictions in early April, the Southeast Asian financial hub has shown relative economic resilience with rebounding aviation and tourism sectors and a rising Singapore dollar trading at record levels against most major currencies.
But more Singaporeans are now tightening their belts in the face of costlier services, food, fuel, retail goods and utilities.
The city-state has also revised down its full-year economic forecast, with expected gross domestic product (GDP) growth whittled down to between 3-4% from a previous range of 3-5%. Trade officials announced the revised range on August 11, citing a weaker external demand outlook and significant downside risks to the global economy amid concerns over persistent inflation.
Singapore’s government, meanwhile, has acknowledged that the cost of living is at the top of people’s minds while offering a sobering outlook on the economy. In a televised address on August 8, Prime Minister Lee Hsien Loong said that Singapore’s outlook has “clouded considerably” due to global economic challenges while warning of “more storms and turbulence” to come.
“The world is not likely to return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades,” said the premier, who in a speech marking Singapore’s national day called on citizens to brace themselves for less “peaceful and stable” times ahead as US-China ties grow increasingly fraught and the conflict in Ukraine thunders on.
Lee said his government stands ready to help citizens cope with rising prices, promising the rollout of further targeted assistance in the coming months following a S$1.5 billion (US$1.09 billion) support package in June.
He added that Singapore’s “deeper response” would be to transform industry, upgrade skills and raise productivity so that wage gains stay ahead of inflation.
Data released in late July showed that Singapore’s headline inflation rate rose to 6.7% in June, the highest since September 2008, jumping from 5.6% in May. Core inflation, which excludes accommodation and private transport costs, came in at 4.4% year-on-year in June, up from 3.6% in May, exceeding polling of economists’ forecasts in both metrics.
Retail sales notably grew at a slower pace in June, cooling from 17.8% growth in May to 14.8%, a data point interpreted by analysts as a sign that consumers are becoming more cautious in their discretionary spending.
Singapore’s economy shrank 0.2% quarter-on-quarter between April to June on a seasonally adjusted basis with second-quarter growth revised down to 4.4% from 4.8%.
According to a research study of 1.2 million retail customers of DBS, Southeast Asia’s largest bank, income growth has not kept pace with inflation for four in 10 people in Singapore. DBS found that the average consumer now spends more of their income – 64% compared to 59% last year – while low-income earners spend 94% of their monthly income on expenses due to inflation.
It doesn’t help that Singapore, as a small island nation, imports almost everything it consumes, making its domestic economy highly exposed to price hikes from overseas. That explains why the Monetary Authority of Singapore (MAS), the city-state’s de facto central bank, has tightened its exchange rate policy an unusual four times in the last nine months.
The MAS typically announces adjustments to its policy stance during twice-yearly monetary policy reviews, typically in April and October. But this year it has undertaken two surprise out-of-cycle tightening moves in January and more recently in July. Against a broad consensus that local inflation has yet to peak, analysts are not ruling out further policy action in October.
Unlike other central banks like the US Federal Reserve that manage inflation through interest rate adjustments, the MAS allows the Singapore dollar to strengthen against the currencies of the city-state’s trading partners to dilute the impact of imported inflation, a key factor behind the local currency’s upward momentum, particularly against regional peers.
But the rate of currency appreciation has also had adverse repercussions, with the MAS reporting a S$7.4 billion ($5.4 billion) net loss in the last financial year due to a large negative foreign exchange translation effect, lower investment gains and higher interest expenses.
As a result, the central bank will not contribute to the government’s consolidated expenditure fund this year.
As central banks across the globe attempt to rein in galloping inflation, an emerging concern among Asia’s trading nations, aside from capital outflows into higher-yielding US dollar investments, is an over-tightening of monetary policy that slows major economies to a recessionary crawl, particularly as the US Federal Reserve signals additional rate hikes.
“It really boils down to whether central banks around the world are able to engineer a soft landing. There is a possibility of over-tightening which triggers a perhaps sharp recession, which will slow demand and impact Singapore greatly because trade is more than three times its overall economic output,” said Song Seng Wun, an economist with CIMB Private Banking.
“The scenario is very much dependent on how well inflation expectations can be contained and the impact of the monetary tightening moves on the respective economies. It’s really at which point the central banks start to see weakness in global growth momentum and feel that they’ve done enough that they can take their foot off the brakes,” he told Asia Times.
Singapore notably became the first country in Asia to enter a recession following the US banking crisis in 2008, and economists have in recent weeks assigned a 30% to 40% chance of a near-term US economic downturn. Possible slowdowns in the US, European Union and China – the city-state’s top three export markets – risk denting substantially demand, investments and capital flows.
The MAS projects that growth momentum for Singapore’s trade-related sectors will continue slowing in the second half of this year, with GDP moderating further into next year as global inflation eases. Despite tepid growth and high inflation on the horizon, the central bank says it does not expect a recession or stagflation to impact Singapore in 2023.
“At the moment in Singapore, more people are coming back to live and work. Demand for rentals is very strong. Businesses complain about costs, but they’re more worried about finding labor. That’s a good problem to have, for now, but that could change if global demand slows,” said Song. “As we move closer towards the start of next year, we may have to worry about that.”
Singapore’s government has said they expect the economy to grow at the lower range of its revised 3-4% forecast, but Chua Hak Bin and Lee Ju Ye of Maybank Kim Eng Research maintain that GDP will come in below that at 2.8% in 2022, factoring in expectations of a significant growth slowdown to 1.3% in the second half of this year.
“The boost from the reopening tailwinds will dissipate, while global headwinds including rising US and global interest rates, China’s slowdown and a probable Europe recession will dampen exports and trade-related services. Higher costs of living and domestic interest rate increases will squeeze consumer wallets and curtail spending,” said the pair in a research note reviewed by Asia Times.
MAS said in its annual report issued last month that core inflation is projected to increase to a peak of 4% to 4.5% in the third quarter, before easing towards the end of this year at around 3.5% to 4%. Based on that assessment, Maybank Kim Eng’s Chua and Lee wrote that they expect “the MAS to maintain the current appreciation bias and stance at the October meeting.”
Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, believes headline and core inflation may not peak until around October or November 2022, predicated on the fact that “while global commodity prices have shown some retracement as supply bottlenecks ease, domestic labor market conditions still remain tight and wage pressures are likely to persist.”
Therefore, when the MAS delivers its monetary policy statement in October, “the base case remains one of another tightening to keep pace with the global frontloading of monetary policy tightening by the other major central banks,” Ling told Asia Times, adding that it is unlikely that any further off-cycle rate adjustments will be announced before then.
CIMB’s Song, meanwhile, said if there are signs that inflation has yet to peak in the current quarter, forcing the MAS to revise its headline and core inflation forecast, a further round of tightening would likely follow. “It can go either way, there are just too many variables. But the way I see it, if current trends continue, the MAS may not have to act again in October,” he said.
Follow Nile Bowie on Twitter at @NileBowie