Economy: Inflation in Singapore will stay high next year even as pace of economic growth slows: MAS. 2022-10-27

Inflation in Singapore will stay high next year even as pace of economic growth slows: MAS

https://www.straitstimes.com/business/inflation-in-singapore-will-stay-high-next-year-even-as-pace-of-economic-growth-slows-mas

2022-10-27

SINGAPORE - Singapore is headed for a troubling year in which economic growth will slow while inflation will remain elevated, in part because wage increases are expected to continue.

Global prices may come off their recent peaks but inflation here will remain higher next year than the historical average, said the Monetary Authority of Singapore (MAS) on Thursday in its biannual Macroeconomic Review.

Meanwhile, the pace of economic growth will slow further in 2023 as pent-up demand at home from economic reopening and external demand for Singapore’s key electronics exports fade.

While the report shows that Singapore does not face an imminent threat of a recession, it warned that the outlook depends on the trajectory of advanced economies such as the United States and the European Union.

A deep and prolonged recession in these economies is still a possibility, with likely spillovers to externally oriented Asian economies such as Singapore.

For now the MAS’ base-case scenario is that the US will avoid a full-year recession, in which case gross domestic product (GDP) growth in Singapore is likely to come in at 3 per cent to 4 per cent for 2022 as a whole, and moderate next year to a below-trend pace - estimated by analysts at around 3 per cent.

Meanwhile, weakening external demand has brought the global electronics cycle to the brink of a downturn. The electronics sector represents the bulk of Singapore’s export-driven manufacturing sector.

MAS said 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, it said. Meanwhile, the momentum of recovery in the travel-related and consumer-facing sectors is set to ease as pent-up demand from economic reopening dissipates.

Consultancy firm Gartner has downgraded its 2022 forecast for global chip sales to 7.4 per cent from its previous forecast of 13.6 per cent.

In 2023, the industry is expected to enter a downturn, with revenue now projected to decline by 2.5 per cent, compared to positive growth previously.

The world’s top semiconductor foundry — Taiwan Semiconductor Manufacturing Company (TSMC) — expects demand for cutting-edge chips used in high-performance computing to remain firm, though the recent US export restrictions on advanced chips and chip equipment to China could hamper orders and sales.

The World Trade Organisation also expects world merchandise trade volume growth to slow to just 1 per cent in 2023, from 3.5 per cent in 2022.

“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,” MAS said.

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The latest electronics PMI for Singapore retreated further to 49.4 in September, its second consecutive month of contraction, as new orders and exports waned.

MAS said slowing external demand, arising from heightened global inflation and tighter financial conditions due to interest rate hikes by major central banks, has also dented growth prospects in the financial sector.

Meanwhile, growth in the insurance industry could also come under pressure.

“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,” MAS said.

A slowing economy will take the vigour out of employment growth, but elevated inflation expectations should keep resident wage growth above pre-Covid rates, *which in turn will add to business costs.

“Resident wage growth is forecast to remain above its historical average next year, leading to an above-trend pace of increase in unit labour cost for services firms in particular, even as it slows compared to 2022.”

Also, local qualifying salary and progressive wage model expansions that came into effect last month, and the salary increases announced to retain workers in the civil service, healthcare and education will likely provide a mild boost to resident wage growth for this year and next.

“Notwithstanding the weakening external outlook, hiring should remain firm in most sectors for the rest of 2022,” MAS said.

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In the latest fourth-quarter hiring outlook surveys by the Singapore Commercial Credit Bureau and the ManpowerGroup, the net employment outlook remained firmly positive even as it moderated slightly from previous readings.

However, moderating global growth and tightening financial conditions will have some impact on labour demand, primarily in the external-oriented manufacturing sector and modern services that include professional, financial and infocomm services.

The central bank maintained its recent inflation forecasts, saying core inflation - which excludes accommodation and private transport costs is projected to average around 4 per cent this year, while the all-items headline inflation should come in at around 6 per cent.

For 2023 as a whole, taking into account all factors including the goods and service tax (GST) hike due in January, core inflation is forecast to average 3.5 to 4.5 per cent. Headline inflation next year is projected to average 5.5 to 6.5% per cent.

Excluding the effects of the GST increase, core inflation may come in between 2.5 and 3.5 per cent, while headline inflation 4.5 and 5.5 per cent.

MAS assertion that inflation will remain above trend comes from the fact that core inflation in the decade before the pandemic started in 2020 averaged at 1.5 per cent.

The report follows the central bank’s decision on Oct 14 to reinforce the appreciation bias of the Singapore dollar that helps damp import costs.

It was the fifth such move by MAS since October 2021. However, inflation remains stubbornly stuck at its highest level in 14 years.

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