The International Monetary Fund (IMF) is maintaining its 1% forecast for Singapore’s real GDP growth this year, citing weak global demand in 1H2023 while keeping its 2024 and 2025 forecasts unchanged at 2.1% and 2.5%, respectively.
The growth in Asia’s advanced economies, excluding Japan, is slowing down due to subdued external demand and the adverse impact of tight monetary conditions on interest-sensitive demand, notes the IMF in its Regional Economic Outlook for Asia and Pacific report, released Oct 18.
The IMF lowered Singapore’s real GDP growth forecast to 1% in May, down from 1.5% in its World Economic Outlook report released in April. In August, the Republic’s Ministry of Trade and Industry narrowed its 2023 GDP growth forecast to 0.5%-1.5% from 0.5%-2.5%.
The IMF expects an ongoing recovery for Singapore, “especially in services”, says Shanaka Peiris, its division chief of regional studies, Asia Pacific department. “That explains why we expect growth to rise to 2.1% next year and then 2.5% [in 2025], which is medium-term potential growth. So, lower growth this year, partly because of the weak external demand, then a gradual pick-up.”
Singapore’s real GDP declined by 5.4% in 2020 owing to the outbreak of Covid-19. Real GDP rebounded to grow 8.9% in 2021 before moderating to 3.6% in 2022.
Meanwhile, the IMF expects the city-state’s inflation to end the year at 5.5% before declining to 3.5% in 2024. This is down from all-items CPI of 6.1% in 2022.
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Goods inflation is easing, says Peiris, but oil prices, which have been on an uptrend since June, pose “real pressures”. He adds: “Services inflation is coming down, but it’s a bit sticky, [especially] with the tight labour markets. With the tight labour markets and increase in the [GST], we expect that there will be some price pressures, but that’s why it’s coming down a bit slowly.”
Asean to grow 4.2% this year
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Asean economies are expected to grow 4.2% in 2023 and 4.6% in 2024, a downward revision of 0.4 and 0.3 percentage points (ppts), respectively, compared to the IMF’s April report.
Krishna Srinivasan, director of the IMF’s Asia Pacific department, says the downgrade reflects weaker growth outcomes, external demand and more lacklustre domestic demand because of waning revenge consumption and monetary policy tightening.
Economic activity in Asia and the Pacific remains on track to contribute around two-thirds of global growth in 2023, says the IMF. Growth in the region is projected at 4.6% in 2023, an increase from 3.9% in 2022, while global growth is forecast to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024.
Srinivasan says the global outlook is supported by continued consumption dynamism in the US but faces pressures from China’s worsening property crisis, tight policy stances around the world, the consequences of Russia’s war in Ukraine and growing geoeconomic fragmentation.
He adds that the Asia-Pacific region remains relatively bright despite a challenging global environment. “It is expected to grow by 4.6% in 2023 and by 4.2% in 2024, which puts it on track to contribute about two-thirds of global growth.”
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The reopening of China’s economy has boosted the service sector and retail sales, as experienced by other economies. says Srinivasan. However, the benefit to the manufacturing sector is proving short-lived, he adds. “The real estate sector in China is grappling with further pressures on debt repayments, home sales and investment. Based on these weaknesses, we have revised China’s growth forecast to 5% for 2023 and 4.2% for 2024.”
The IMF expects China’s growth to slow over the coming years, reaching 3.4% by 2028 “with more declines further into the future”. “This represents a slower growth path compared with earlier projections and is underpinned (as in other major economies) by demographic headwinds with the working-age population shrinking and declining productivity growth, including a slowdown in reform momentum.”
In a few advanced economies in Asia, core inflation remains sticky due to tight labour markets and positive output gaps, says Srinivasan. “Except for Japan, inflation is expected to return to within target ranges by the end of 2024. This puts Asia ahead of the rest of the world regarding disinflation, although the risk of more persistent inflation could materialise, given recent commodity price spikes and exchange rate changes yet to pass through fully.”
Central banks should stay the course, he adds. “With still accommodative financial conditions in Asia’s emerging markets and the upside risks mentioned above, there is no urgent need to ease monetary policy. Higher oil prices could lead to higher inflation expectations and second-round effects even in Asia’s advanced economies with tight labour markets, requiring higher-for-longer rates.”
New rules-based order
In a recent speech in Washington, DC, Deputy Prime Minister Lawrence Wong expressed Singapore’s interest in collaborating with the US on an update to “the rules of the new global order”, which includes post-war institutions like the United Nations, the World Trade Organization and the IMF.
Speaking at the Centre for Strategic and International Studies on Oct 13, Wong said changes are needed to ensure these institutions are “fit for our times”.
He adds: “Increasingly, we do hear concerns about shortcomings in the global order, that it does not adequately address concerns around national security, supply chain resilience, et cetera.”
The IMF has dedicated a chapter in its Regional Economic Outlook on geoeconomic fragmentation, says Peiris. “One of our roles has been to explain the implications of these scenarios to the world… We are playing the role of an independent viewer of things. We have been calling for more dialogue, multilateral solutions [and] regional arrangements, which also encourage greater integration.”
The IMF’s report explores spillover effects from a “de-risking” scenario if countries change how they source goods and services through “friend-shoring” or “reshoring”.
In a “friend-shoring” scenario, the OECD and China impose non-tariff trade barriers on each other to reduce mutual interdependence but do not restrict trade with other countries. Global GDP declines by 1.8%, with the economic losses being the largest for China at 6.8% of GDP in the long term.
Based on the IMF’s model, the economic effects are small for the rest of the world, at between –0.2% and –0.7% of GDP, with two forces cancelling each other. “While trade is diverted to other countries, increasing demand for their exports, the large economic losses in China and the OECD notably lower their demand from the rest of the world, dampening the positive effects from trade diversion.”
The IMF says that a “reshoring” scenario, in which China and the OECD increase non-tariff trade barriers on all countries, results in “significantly larger” global output losses of about 4.5% in the long term. “The additional distortions from non-tariff trade barriers lead to less-efficient resource allocation and higher input costs amplified through global value chain linkages.”
In this scenario, China experiences a 6.9% loss as the OECD regions reduce their demand for their goods. For the OECD regions, losses range from 3.8% to 10.2% of GDP.
Southeast Asia, in particular, experiences a “large” loss of 9.1% because it is “highly open” with strong trade links with China and the OECD economies, says the IMF. “Therefore, the demand for its exports is falling enough to induce a large GDP contraction, with significant negative spillovers on the domestic economy.”
The IMF also says for each percentage point of “friend-shoring” and “reshoring”, long-term global GDP losses are about 0.25% and 1.5%, respectively. “While these are smaller than potential losses from extreme fragmentation, these estimates underscore how ‘de-risking’ can still present a non-trivial drag on growth in Asia and beyond.”
Photos: International Monetary Fund
