Bellwether Singapore buffeted by global headwinds

SINGAPORE — Consumer prices in Singapore have hit their highest level in 13 years and are expected to rise as the notoriously expensive city-state, an indicator of global economic growth trends, grapples with imported inflation, heightened geopolitical risks and fears that its major trading partners may be slowing down or heading into recession.

Since the easing of most pandemic-related restrictions in early April, Southeast Asia’s financial hub has shown relative economic resilience with the rebound in the aviation and tourism sectors and the rise in the Singapore dollar trading at record highs against most major currencies.

But more and more Singaporeans are tightening their belts in the face of more expensive services, food, fuel, retail goods and utilities.

The city-state also downgraded its full-year economic forecast, with expected gross domestic product (GDP) growth down to 3-4% from a previous range of 3-5%. . Trade officials announced the revised range on Aug. 11, citing a weaker external demand outlook and significant downside risks to the global economy amid lingering inflation concerns.

The Singapore government, meanwhile, has acknowledged that the cost of living is at the top of people’s minds while providing a sobering perspective on the economy. In a televised address on August 8, Prime Minister Lee Hsien Loong said Singapore’s outlook had darkened “significantly” due to global economic challenges while warning of “more storms and turbulence” to come.

“The world is unlikely to return anytime soon to the low levels of inflation and low interest rates that we have enjoyed over the past few decades,” said the Prime Minister, who in a speech marking the National Day of Singapore, called on citizens to prepare for less “peaceful conditions and stable times ahead as US-China relations become increasingly strained and the conflict in Ukraine rumbles.

Lee said his government was ready to help people cope with rising prices, promising to roll out additional targeted aid in the coming months after a 1.5 billion Singapore dollar support package (1 $.09 billion) in June.

He added that Singapore’s “deeper response” would be to transform industry, improve skills and increase productivity so that wage gains remain above inflation.

Prime Minister Lee Hsien Loong is calling on Singaporeans to prepare for less “peaceful and stable” times ahead. Image: Twitter

Data released in late July showed Singapore’s headline inflation rate hit 6.7% in June, the highest since September 2008, from 5.6% in May. Core inflation, which excludes accommodation and private transport costs, came in at 4.4% year-on-year in June, from 3.6% in May, beating polls of economists’ forecasts in both measures.

Retail sales notably rose at a slower pace in June, rising 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 purchases. discretionary spending.

Singapore’s economy shrank 0.2% quarter-on-quarter between April and June on a seasonally adjusted basis, with second-quarter growth revised to 4.4% from 4.8% .

According to a Research study of the 1.2 million retail customers of DBS, Southeast Asia’s largest bank, revenue growth has not kept pace with inflation for four in 10 people in Singapore. DBS found that the average consumer is now spending more of their income – 64% compared to 59% last year – while low-income people 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 abroad. This explains why the Monetary Authority of Singapore (MAS), the city-state’s de facto central bank, has tightened its exchange rate policy four times in the past nine months.

The MAS usually announces adjustments to its monetary policy during semi-annual monetary policy reviews, usually in April and October. But this year it made two surprise off-cycle tightening moves in January and most recently in July. Faced with 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 which manage inflation through interest rate adjustments, the MAS allows the Singapore dollar to strengthen against the currencies of the city’s trading partners. government in order to dilute the impact of imported inflation, a key driver of local currency appreciation. upward momentum, especially against its regional peers.

But the rate of currency appreciation has also had a negative impact, with MAS posting a net loss of S$7.4 billion ($5.4 billion) in the last financial year due to a significant negative foreign exchange rate, lower investment gains and higher interest expense.

As a result, the central bank will not contribute to the government’s consolidated spending fund this year.

The Monetary Authority of Singapore is taking aggressive action to contain inflation. Photo: iStock/Getty Images

As central banks around the world attempt to rein in runaway inflation, an emerging concern among trading nations across Asia, aside from capital outflows into higher-yielding US dollar investments, is excessive policy tightening. monetary policy that is slowing major economies toward recession, especially as the US Federal Reserve signals further rate hikes.

“It really comes down to the ability of central banks around the world to stage a soft landing. There is a possibility of over-tightening triggering a possibly severe recession, which will dampen demand and have a huge impact on Singapore as trade is more than three times its overall economic output,” said Song Seng Wun, an economist at CIMB Private Banking.

“The scenario very much depends on the ability to contain inflation expectations and the impact of monetary tightening measures on the respective economies. This is really when central banks start to see weakness in the global growth momentum and believe they have done enough to be able to ease off the brakes,” he told Asia Times.

Singapore notably became the first country in Asia to slip into recession after the 2008 US banking crisis, and economists in recent weeks have assigned a 30-40% chance of a US economic slowdown in the near term. Possible slowdowns in the United States, the European Union and China – the city-state’s three main export markets – are likely to significantly damage demand, investment and capital flows.

The MAS predicts that growth momentum in Singapore’s trade-related sectors will continue to slow in the second half of this year, with GDP moderating further next year as global inflation declines. Despite sluggish growth and high inflation on the horizon, the central bank says it does not expect a recession or stagflation to hit Singapore in 2023.

“Right now in Singapore, more and more people are coming back to live and work. Rental demand is very strong. Companies complain about costs, but they are more concerned about finding workers. It’s a good problem to have, for now, but that could change if global demand slows,” Song said. “As we get closer to the start of next year, we may have to worry about that.”

Singapore’s government has said it expects the economy to grow in the lower range of its revised forecast of 3-4%, but Chua Hak Bin and Lee Ju Ye of Maybank Kim Eng Research argue that GDP will be less than 2.8% in 2022, given expectations of a significant slowdown in growth to 1.3% in the second half of this year.

“The reopening boost from tailwinds will dissipate, while global headwinds, including rising US and global interest rates, slowing China and a likely recession in Europe, will dampen exports and trade. trade-related services. The rising cost of living and rising national interest rates will squeeze consumers’ wallets and reduce spending,” the couple said in a research note reviewed by Asia Times.

MAS said in its annual report released last month that core inflation is expected to rise to a peak of 4% to 4.5% in the third quarter, before slowing towards the end of this year to around 3.5. % to 4%. Based on this assessment, Chua and Lee of Maybank Kim Eng wrote that they expect “MAS to maintain the current bias and stance of appreciation at the October meeting.”

Food prices are soaring in Singapore, which depends on imports. Photo: AFP / Catherine Lai

Selena Ling, chief economist and head of research and treasury strategy at OCBC Bank, believes headline and core inflation may not peak until October or November 2022, based on the fact that “while Global commodity prices have shown some retracement as supply bottlenecks ease, domestic labor market conditions remain tight and wage pressures are expected to persist.

Therefore, when the MAS releases its monetary policy statement in October, “the baseline scenario remains for further tightening to keep pace with the global frontloading of monetary policy tightening by other major central banks,” it said. Ling told Asia Times, adding that further off-cycle rate adjustments are unlikely to be announced before then.

CIMB’s Song, meanwhile, said that while there were signs that inflation had yet to peak in the current quarter, causing MAS to revise its headline and core inflation forecasts, a new round of tightening would likely follow. “It can go either way, there are just too many variables. But in my view, if current trends continue, MAS may not have to act in October,” he said.

Follow Nile Bowie on Twitter at @NileBowie

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