Singapore economy faces uncertain near-term outlook, inflation to slow in second half of 2023: MAS

SINGAPORE: The Singapore economy faces an “uncertain and fragile” outlook in the near term, as the slowdown in the global electronics industry and recent bank collapses abroad dampen growth prospects, said the Monetary Authority of Singapore (MAS) on Wednesday (Apr 26).

But core inflation, which remains near multi-year highs, is expected to “slow more discernibly” in the second half of 2023, it added in its latest half-yearly macroeconomic review.

The Singapore economy has “decelerated considerably” since the end of last year. Growth, on a year-on-year basis, slowed to 2.1 per cent in the fourth quarter of last year before decreasing further to 0.1 per cent in the first three months of 2023.

The slowdown is largely due to contractions in the trade-related sectors amid the ongoing global manufacturing and trade downturn, especially in electronics.

“Electronics production and trade have a more direct and significant impact on the Singapore economy compared to the broader global economic cycle, given the deep and extensive trade linkages and electronics supply chains in the region,” said the central bank.

MAS expects the global electronics industry to remain in a downturn for the first half of 2023. After which, the outlook remains clouded by uncertainties such as rising interest rates and growing risks of fragmentation in global tech supply chains.

This means that the local electronics industry may only see “a more discernible recovery predicated on a pick-up in global demand” in the second half of the year.

Growth is also set to be subdued in the financial sector amid a dimming external outlook, persistent inflation and restrictive financial conditions. In addition, the recent banking turmoil in the United States and Europe has fanned fears of a broader contagion in the sector, raising downside risks to growth.

MAS said that while regulators intervened decisively to limit the fallout, the outlook remains uncertain as “latent vulnerabilities” could emerge among under-capitalised banks globally in the coming quarters.

It added that the local banking system “appears to be well-insulated from the shock” at this juncture, citing diversified, large corporate-heavy and Asia-centric loan books and minimal exposure to the tech start-up ecosystem.

While Singapore banks could face losses on their bond holdings amid the sharp rise in interest rates, less than 20 per cent of their total assets are in bonds, said MAS.

This is compared to the 55 per cent for Silicon Valley Bank, the US bank which collapsed abruptly last month and marked America's biggest banking failure since the 2008 global financial crisis.

With the bulk of their assets in floating rate loans, the Singapore banks have also been able to pass on the higher funding costs to their customers, the central bank said.

MAS also reiterated that the takeover of Credit Suisse by UBS is not expected to impact the stability of Singapore’s banking system.

That said, the high interest-rate environment will continue to exert “a broad-based drag on the financial sector” in the coming quarters, according to the report.

For example, credit demand is likely to weaken, while the stock of loans could also shrink further as corporates look to reduce interest expenses by repaying early.

Elsewhere in the economy, the pace of expansion in the domestic-oriented sectors will likely moderate as higher consumer prices and interest rates restrain spending.

“The near-term outlook remains uncertain and fragile, with risks to growth skewed to the downside,” said MAS, as it maintained its full-year forecast for growth in 2023 at between 0.5 to 2.5 per cent.

“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.”

INFLATION TO SLOW

Turning to inflation, MAS said core inflation, which excludes accommodation and private transport, rose further to 5.4 per cent in the first quarter of the year.

This reflects the expected boost to consumer prices from the 1 percentage point increase in the Goods and Services Tax (GST), as well as firm business cost pressures amid a tight domestic labour market.

The central bank expects core inflation to remain elevated over the next few months, as businesses “continue raising prices at a firm pace” to pass on cost increases.

“However, (core inflation) will remain on a broad moderating path and should slow more discernibly in the second half of the year,” it said.

“Barring fresh shocks to global supply, import prices, which are already falling, should decline further in tandem with lower global commodity prices and the general strengthening of the (Singapore dollar).”

To tackle inflation, the MAS tightened monetary policy five times in a series of scheduled and off-cycle policy moves since October 2021.

Earlier this month, it opted to stand pat, joining a growing list of central banks that have opted to hit the pause button on tightening amid global growth risks and ebbing inflation.

The central bank said on Wednesday that it expects core inflation to fall to around 2.5 per cent by the end of 2023. For the year, the forecast range remains at 3.5 per cent to 4.5 per cent.

Headline inflation for 2023 is expected to “come in higher” at 5.5 per cent to 6.5 per cent, reflecting the still-tight supply of COEs and firm accommodation costs.

Excluding the effects of the GST increase, core and headline inflation are expected to be lower, averaging 2.5 to 3.5 per cent and 4.5 to 5.5 per cent, respectively.