As the Ministry of Trade and Industry (MTI) revealed flash estimates for Singapore’s GDP for the 2Q2022 on July 14, the Monetary Authority of Singapore (MAS) announced its plan to further tighten its monetary policy stance on the same day.
The central bank will re-centre the mid-point of the Singapore dollar nominal effective exchange rate (S$NEER) policy band up to its prevailing level. There will be no change to the slope and width of the band.
The MAS also upgraded its headline and core CPI forecasts in addition to taking a further calibrated step to lean against price pressures.
OCBC keeps GDP and inflation estimates unchanged
“Today’s off-cycle move to arrest any inflation expectations shift early clearly signifies some policy resolve to tamp down imported inflation and likely puts the S$NEER positioning at a more comfortable level for the near-term,” says Selena Ling, chief economist & head treasury research & strategy at OCBC Bank.
On MTI’s flash GDP estimates for the 2Q2022, Ling says a recession is “not on the cards” for Singapore’s economy at this point despite the external headwinds.
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The advance 2Q2022 GDP growth estimates stood lower than the estimates of the street’s 5.4% y-o-y forecast as well as Ling’s forecast of a 5.3% growth y-o-y.
“Potential recession worries in the US and Eurozone (partly due to the current energy crisis) and hard landing concerns for China are starting to weigh on business and consumer confidence at this juncture, especially amidst the aggressive frontloading of monetary policy tightening by major central banks like the US Federal Reserve,” she notes.
“Even if a recession does not actually materialise for these major trading partners, a slowing external growth momentum will still weigh on Singapore’s trade-related sectors for the next six months and our GDP growth is tipped to moderate further into 2023, likely to around or even below the 3% y-o-y handle,” she adds.
See also: MAS set to hold monetary policy as inflation persists
To this end, Ling has kept her GDP growth forecast for 2022 at 3.5% to 4.0% y-o-y. Her headline and core CPI estimates are also unchanged at 5.6% and 4.1% respective.
Looking ahead, Ling sees the outlook for 2023 remaining “highly uncertain”.
This is because “much would depend on whether the global tide of aggressive monetary policy tightening subsides if the global economy gives way and inflation prints stabilise,” she says. “However, many central bankers have pivoted to indicate that inflation will remain structurally higher beyond the short-term, hence their obsession with inflationary expectations becoming entrenched and the need to frontload more aggressive tightening.”
To the analyst, the inflation-growth nexus remains “very dynamic”; the world will have to watch for whether global commodity prices stabilise further, as well as the US Fed’s decision to hike 75 or 100 basis points (bps) at the upcoming Federal Open Market Committee (FOMC) on July 27.
The potential tightening of the local labour market is also another factor in terms of where the inflation-growth nexus heads to next.
In her report, Ling further questions the need for other policy tools to achieve additional targeted help for vulnerable Singaporeans to cope with the cost-of-living issues beyond the recently announced $1.5 billion package.
“Second, would there be any policy response to the continued buoyancy in asset prices in Singapore including COE premiums and the private residential property market?” mulls the economist.
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Maybank Securities keeps GDP estimates but raises inflation forecasts
Maybank Securities economists Chua Hak Bin and Lee Ju Ye are keeping their GDP growth forecast for 2022 at 2.8%. Unlike their peers, the economists deem MTI’s flash estimates as above their estimate of 4%.
The higher-than-expected GDP was due to better-than-expected performance in the manufacturing and services sectors.
However, they see the MTI as likely to downgrade its GDP growth forecast to the lower range of 3%-4% (from 3%-5%) when the final 2Q GDP estimate is released.
While the economists are expecting the republic to see a 4.4% y-o-y expansion in its 1H2022 GDP, they foresee a steep deceleration in growth to around +1.4% in the second half of the year.
“This will be on the back of a sharp slowdown in global growth and tightening monetary conditions,” they write.
The analysts also see the US Fed as “likely” to hike rates by 75 or 100 bps at its upcoming meeting following the 9.1% surge in inflation in June.
In line with MAS’s guidance, Chua and Lee are raising their inflation forecasts for 2022 with headline CPI to average 5.5% in 2022 from 5.2% previously. The economists’ core CPI estimate is also raised to 3.5% from 3.2% previously.
“We expect inflation to peak in the third quarter, at around +4% for core CPI and +6% for headline CPI,” they write.
“Falling commodity prices and slowing global growth will help cool external inflationary pressures by the fourth quarter. Global food prices are showing signs of easing, with the UN Food and Agriculture Organisation (FAO) Food Price Index falling to a four-month low in June,” they add.
“Oil prices are some 18% down from their peak in end May. Domestically, however, a tight labour market and the increase in wages for lower-income workers (introduction of the local qualifying wages and expansion of the progressive wage model to the retail sector in September) will likely keep wage cost pressures firm,” they continue. “Wage growth is expected to stay elevated following the +7.8% print in 1Q (vs. +3.6% in 2021).”
To this end, Maybank’s Chua and Lee foresee the MAS to maintain the “current tighter stance” at the October meeting, “unless inflation surprises on the upside yet again”.
“Our model suggests that the S$NEER is at about +0.7% above the mid-point of the new re-centred band, with considerable room left for further appreciation,” they write.
In 2023, the economists have lowered their GDP growth forecast to 1.5% from 2.5% previously.
“Global growth will likely slow significantly as major trading partners tighten monetary policy aggressively in response to elevated inflation, which will dampen consumer and investment spending,” they write.
Balance of probabilities tilted in favour of 100 bps hike in July; further slope steepening remains for MAS: Mizuho
Vishnu Varathan, Mizuho Bank’s head, economics & strategy, Asia & Oceania treasury department, says that the July FOMC is more likely to see a 100 bps hike.
In his report, Varathan notes that markets are now betting on a 75 bps or 100 bps hike in the upcoming meeting, even if Fed Chair Jerome Powell had qualified previously that 75 bps hikes should not be seen as a common occurrence.
To be sure, markets are pricing almost 65% odds for a 100 bps hike in July, says Varathan.
“This however is an intensification of hawkish bets, not an outright surprise,” he writes.
“Whereas for a hawkish surprise proper, we turn to the MAS that is a ‘step’ ahead,” he continues, referring to MAS’s surprise move to re-centre the S$NEER higher to prevailing levels.
“What this does is to immediately lift the policy band mid-point to prevailing S$NEER levels at in the upper half (we estimate +120-150bp above the mid-point since June),” says Varathan. “S$NEER jump to maintain a good part of pre-existing traction translates into immediate S$NEER jump of [around] 100-150 bps and corresponding SGD strength (USD/SGD slipping from above mid-1.40 to mid-1.39”.
On MAS’s decision, Varathan attributes it to the “significant upward revisions” to inflation that was a “dead giveaway in conveying the pressing and broadening step-up in price shocks”.
“[This is as] upstream price shocks have cascaded down more forcefully, pervading across a broad swath of imported goods,” he writes.
“Taken alongside re-opening demand sustenance/lift, the MAS probably saw fit to front-load this step appreciation to lean against higher and more persistent peaks in inflation,” he continues. “We think a further slope steepening remains on the table for October even as the MAS carefully assesses global recession risks and the delicate balance of risks.”
ING not surprised to see another off-cycle tightening by the MAS
MAS’s decision to tighten its policy ahead of the scheduled October meeting came as no surprise to ING’s senior economist, Nicholas Mapa.
“We were not all that surprised to see another off-cycle tightening by the MAS as short-end rates have clearly signalled an intention to keep the currency on the stronger side,” he writes. “But we had expected the adjustment to happen after an inflation data release.”
With forecasts pointing to even higher inflation prints, Mapa, like Mizuho’s Varathan, is expecting to see further action taken by the MAS at its October meeting.
“The SGD will be supported by today’s policy tightening, but with overall sentiment remaining pressured, immediate benefits may be hard to spot,” he says.
MAS’s decision ‘more hawkish’ and earlier-than-expected: Citi
Citi Research analyst Kit Wei Zheng, on the other hand, sees the decision by the MAS as “more hawkish” and “slightly earlier” than his expectations for an off-cycle 50 bps slope steepening and possible 50 bps to 100 bps upward re-centring in July.
“With the S$NEER trading around 170 bps above the mid-point at the time of the announcement, and the tracking error vs MAS NEER on week of June 24 around +18 bps, we reckon the band was recentred upwards by 150 bps,” he writes.
The off-cycle re-centring, despite a slowdown in Singapore’s 2Q2022 GDP “represents a decisive tightening of policy settings in real terms”.
“Today’s off-cycle tightening likely also reflected urgency in tempering the public’s inflation expectations, with both one-year and five-year inflation expectations already rising sharply in 1Q2022,” says Kit.
“Based on our current core forecasts, without further tightening, the neutral path of the NEER would be around the mid-point of the band through 2023-2024 once the one-off impact of GST was excluded, though more likely in the upper half of the band if the GST impact was included,” he adds.
“With policy settings already tight, the hurdle for another upward re-centring in Oct could be higher. This is barring more large upside surprises in core inflation prints and/or import prices, which could raise the neutral path of the NEER,” he continues.
That said, Kit still sees scope for the slope to steepen in October for five reasons.
First, his core and headline inflation forecasts for 2022 being around 20 bps higher than the midpoint of the MAS’s revised forecasts.
In its release, the central bank raised its forecasts for both core and headline inflation, which is “directionally consistent with Citi’s”.
“We see core [inflation] peaking and staying at a higher level. We see core rising to 4.4% in June and peaking at 4.7% in July, ending 2022 at 3.9%. Overall, we see 2022 core averaging 3.7%, and headline averaging 5.7%,” he writes.
Second, a further likely increase in 2Q2022 inflation expectations could also be of concern, especially with the surge in food inflation.
“This reflects the sizeable weight and higher frequency of food consumption, along with likely continued pass through of upstream cost pressures,” says Kit.
Third, Kit sees labour costs as likely to remain elevated going into 2023 due partly to policies to boost wages of low to middle income workers.
Fourth, “given the confluence of various cost pressures and lags in policy transmission, it is not clear if today’s move will be sufficient to arrest inflation momentum before the GST hike in January 2023, in which case, questions can be raised about the extent to which MAS can completely ignore the GST impact on inflation and inflation expectations”.
Finally, with Kit’s expectations for Singapore’s core inflation to stay above 2% in 2023 to 2024 even without the impact of the higher GST, a 50-100bps slope steepening in Oct could more strongly ensure that the slope (and not just the level of the NEER) is at least neutral, if not tight in real terms, he says.
Further to his report, Kit says a re-centring rather than a slope change dampens the expectations for SG-US spread widening.
“Theoretically, SG rates as a spread to its trading partners (proxied by US rates) are not impacted by any re-centring moves for the NEER. However, to the extent that it shapes expectations of future slope change expectations for NEER band, they are relevant,” he writes.
“With today’s aggressive upward re-centring of the NEER band and seemingly higher hurdle for further hawkish action, the expectations of further widening of SG-US spread is likely to dampen.”
“We do assess that if the expectation of slope steepening to ~200bp does get emboldened in weeks ahead, SG-US swap spread is likely to widen again (SG rates to outperform). But with the US swaps pricing in a peak Fed fund rates early next year and cuts after that, the widening of SG-US swap spread may limit itself to shorter tenors instead. For now, SG rates are likely to be more reactive to US rates moves and the yield curve is more likely to flatten,” he adds.
MAS expected to further tighten policy at October meeting: RHB
RHB Group Research senior economist Barnabas Gan is keeping his GDP forecast for 2022 unchanged at 3.5%.
He also expects Singapore’s GDP for the 2H2022 to print a growth of 2.7% y-o-y following the 4.4% y-o-y expansion printed in the 1H2022.
For the remainder of the year, Gan foresees the headwinds to centre on the potentially higher consumer prices, cooling global trade demand and supply chain disruptions.
“Nonetheless, 2Q22 GDP in real terms is already 6.4% above 2019’s average, underlining that Singapore’s economy has recovered considerably from the Covid-19 trough,” he writes.
Referring to the MTI’s 2Q2022 GDP flash estimate, where Singapore posted zero growth on a q-o-q basis, Gan noted that the manufacturing momentum has slowed into May 2022. During the month, industrial production rose a mere 0.7% m-o-m on a seasonally adjusted basis, more than three times slower compared to a 2.6% m-o-m seasonally adjusted pace in the previous month.
“Even so, non-oil domestic exports (NODX) momentum remained in the contractionary zone for three straight months (March-May 2022),” he says.
On MAS’s unexpected move to tighten its monetary policy, Gan says that the recentring has lifted the mid-point by 120 basis points, based on his estimate that the S$NEER traded at 1.2% above the mid-point.
“The move to tighten, however, surprised us, given that there is ample headroom (approximately 80 bps for the S$NEER to appreciate further and inflation momentum is likely to ease towards year-end,” he writes.
“The fact that the MAS leaned towards a tightening decision today suggests that policymakers are increasingly worried about inflationary risks,” he adds.
To this end, Gan’s view for another tightening move in October remains unchanged.
“We expect the MAS to further tighten policy at the upcoming October meeting via a ‘slight’ increase of 0.5% in the slope gradient while keeping the width and the level at which it is centred unchanged,” he says.
2Q2022 GDP weakness ‘could be limited’: CGS-CIMB
The GDP growth for the 2Q2022 may appear robust, but that figure is distorted due to the low base effect from the same period the year before, says CGS-CIMB economist Nazmi Idrus.
On a q-o-q seasonally adjusted basis, economic growth stood stagnant at 0%, he points out.
“According to MAS, growth on a q-o-q seasonally adjusted basis was weighed down by the trade-oriented sectors such as wholesale and manufacturing despite the stellar performance of the retail sector,” he writes.
“Looking at available data, retail sales growth in April to May was strong owing to the pent-up demand at 15.0% y-o-y or 1.4% m-o-m seasonally adjusted driven by a broad list of components including recreational goods, food & beverage, minimarts, and apparel & footwear,” he adds.
On MAS’s surprise move to tighten its monetary policy, Idrus says that indicates that the central bank sees inflation as a bigger threat to its domestic economy.
While MAS increased its inflation forecast for the year, Idrus is keeping his headline CPI forecast unchanged at 5.1% y-o-y for 2022.
He is also keeping his GDP growth for 2022 and 2023 unchanged at 3.8% and 2.0% y-o-y respectively.
The way Idrus sees it, Singapore’s growth will likely be driven by domestic factors, although the robust pent-up demand should continue albeit at a slower pace.
“Overall, we suspect the recent 2Q22 GDP weakness in the advance estimate could be limited – as the weaker shipments from China amid the recent lockdown could improve as China embarked on its reopening in June,” he writes.
“That said, the global outlook is still dim as the world is likely to pare down on demand as monetary policy is tightened and inflation soars. Even in China, the support from the reopening and pent-up demand is projected to be temporary as the risk of another lockdown is looming,” he continues.
