External economic conditions and ongoing COVID-19 restrictions expected to impact Singapore’s growth trajectory.
SINGAPORE: The Monetary Authority of Singapore (MAS) has projected a slowdown in the country’s economy at a “below-trend pace” in 2023, citing increasing challenges from the external environment, as announced on Thursday (Oct 27).
As a result, overall labor demand is anticipated to “soften somewhat” alongside a moderation in wage growth, according to the MAS’s latest half-yearly macroeconomic review.
Advance estimates indicate that the Singapore economy grew by 4.4 percent year-on-year in the third quarter, slightly below the revised growth figure of 4.5 percent from the previous quarter. This growth has been partially supported by sectors benefiting from the reopening of borders.
However, the tightening of global financial conditions and ongoing COVID-19 restrictions in various countries are expected to hinder growth in Singapore’s key trading partners. Consequently, the country’s trade-related sectors are likely to experience subdued growth in the upcoming quarters.
“Diminished global and regional trade flows will negatively impact Singapore’s manufacturing, wholesale, water transport, and storage sectors, even as global supply disruptions begin to ease,” the MAS report stated.
Particularly concerning is the global electronics industry, which saw strong demand post-pandemic until early this year but has recently experienced a rapid downturn. Global chip sales decreased by 3 percent year-on-year between July and August, indicating a shift into a “consolidation phase.”
For Singapore, demand for electronic products has decreased in its two largest markets—China and the United States—due to high inflation, tightening financial conditions, and consumers shifting spending towards services. Investment demand for technology equipment in the US has also “slowed considerably” since its peak last year.
The MAS warned that a more significant decline in final demand could lead to an inventory correction for end-products, exacerbating the decrease in sales for intermediate semiconductor inputs and worsening the oversupply of chips.
Additionally, the financial sector’s growth prospects will continue to be affected by reduced external demand due to heightened global inflation and tighter financial conditions. The outlook for sentiment-sensitive segments within the financial sector—such as fund management—is expected to remain negative, especially with further tightening measures from central banks worldwide.
The travel and consumer-facing sectors, while recovering next year, are likely to do so at a slower pace as consumer sentiment may wane amid inflation and an uncertain economic environment. Furthermore, unfulfilled pent-up consumption demand is expected to favor overseas travel over domestic spending.
In the construction sector, labor shortages and high construction material costs are projected to weigh on the outlook, even as activity picks up in 2023.
“Overall, GDP growth is likely to remain muted in the coming quarters,” the MAS reiterated, maintaining its official growth forecast for 2022 at a range of 3 to 4 percent. “With weaker external demand conditions, the economy is projected to slow further to a below-trend pace in 2023, primarily driven by the trade-related cluster.”
SOFTER LABOR DEMAND, WAGE GROWTH
The slowdown in global growth and tightening financial conditions are expected to have “some impact” on labor demand, particularly in external-oriented manufacturing and modern services, according to the MAS.
“Notably, the slowdown in global manufacturing demand could hinder workforce expansion in the domestic sector, given the spillover effects through global supply chains, especially in electronics production. Labor demand in modern services could also ease,” the MAS added.
However, due to “significant wage flexibility” and ongoing shortages for skilled workers, adjustments in labor market conditions in these sectors “should largely occur through a decrease in job vacancies and wage growth, rather than through large-scale job losses.”
“Given the starting point of a very tight labor market, there is some scope for labor demand to weaken and job vacancies to decrease without a significant rise in resident unemployment,” the MAS noted.
Firms are expected to continue hiring non-residents to fill workforce gaps, especially in construction, marine shipyard, and processing sectors. Together with moderating labor demand, excess labor market tightness is likely to ease in the first half of next year.
Accordingly, wage growth is expected to moderate in 2023, but “remain slightly above pre-COVID rates.”
“While labor supply constraints are projected to ease in the second half of 2022, they should continue to contribute to above-average wage growth, as the effects of a tight labor market on nominal resident wage growth take about three quarters to be fully realized,” the report stated.
Additionally, other factors, such as the progressive wage model for low-wage workers, are expected to provide “short-term boosts” to wage growth.
INFLATION TO REMAIN HIGH
Regarding inflation, the MAS reiterated its forecasts for core inflation—excluding accommodation and private transport costs—to average around 4 percent this year, while overall headline inflation is expected to reach approximately 6 percent.
This is attributed to significant imported inflation across various goods and services, coupled with a tight labor market that continues to support substantial wage increases.
Moreover, under favorable demand conditions, businesses are anticipated to increase prices further to offset the accumulated import and domestic costs within Singapore’s production chains.
Latest data revealed that Singapore’s core inflation rose to 5.3 percent in September, driven primarily by increased prices in food, services, and retail goods. This marks a rise from 5.1 percent in August.
The overall consumer price index, or headline inflation, remained unchanged at 7.5 percent year-on-year in September.
Core inflation is expected to stay elevated in the first half of next year before “moderating more significantly” in the latter half as cost pressures ease and demand conditions soften, the MAS indicated.
For 2023, considering various factors—including the anticipated hike in the Goods and Services Tax (GST)—core and headline inflation are projected to average between 3.5 and 4.5 percent and 5.5 and 6.5 percent, respectively.
Excluding the impacts of the GST increase, core inflation is set to range from 2.5 to 3.5 percent, while headline inflation is expected to average between 4.5 and 5.5 percent.
The MAS reiterated that the cumulative effects of its five monetary policy tightening measures since October of last year will help “ensure medium-term price stability, forming the basis for sustainable economic growth.”
