Singapore’s economy is seemingly on track to continue expanding in the coming quarters despite the ongoing tensions between Russia and Ukraine and the resultant impact on global supply chains.
The optimism follows the major easing of domestic safe management measures and borders restrictions as the republic moves toward treating Covid-19 as endemic, the Monetary Authority of Singapore (MAS) highted in its half-yearly macroeconomic review on Apr 28.
"Domestic demand, particularly private consumption as well as public infrastructure investment, would be the main source of growth in 2022,” it flagged.
For instance, Singapore’s hoping to see a revival in its retail and travel-related industries in 2Q2022, earlier than the second half of the year as was expected.
"The drivers of growth should broaden to the domestic-oriented and travel-related clusters over the course of this year. Accordingly, sectors which bore the brunt of the pandemic are projected to stage a more decisive recovery and contribute more significantly to gross domestic product (GDP) growth in 2022 compared with last year," MAS added.
Against this backdrop, the central bank is maintaining its forecast for Singapore’s GDP to grow by 3% to 5% this year, barring an escalation in tensions between Russia and Ukraine and a deterioration in the Covid-19 crisis.
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While the projected growth range is a moderation from the 7.6% expansion seen in 2021, it still be above-trend for the second consecutive year, MAS explained.
Even so, the government body noted that inflation has been a major global concern, especially since the Russian – Ukraine crisis has affected the supplies and in turn prices of commodities such as food grains, oil and gas and industrial metals.
The supply-driven price shocks are now eroding real incomes and could potentially depress demand for goods and services as well as investment flows, MAS cautioned.
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Being a export and import-oriented economy means that Singapore is very susceptible to rising inflation levels from its trading partners.
Core inflation - which measures the total level of inflation excluding that for accommodation and private transport - hit a 10-year high last month, and is expected to remain significantly higher than the historical average of about 1.6%.
This triggered a monetary policy tightening by the central bank to curb the surge in prices. This is the third time it is doing this since October 2021.
The central bank is expecting core inflation to hit a peak of around 4% in 3Q2021 before moderating in late 2022. This is assuming that there is some stabilisation in global commodity prices and supply constraints are partially resolved.
While labour shortages could ease, "elevated oil and agricultural commodity price levels are forecast to filter through to higher operating costs in Singapore over an extended period", it explained
"Together with rising unit labour costs stemming from the tight labour market, business costs will accumulate further and be passed through to consumer prices amid firm demand," MAS added.
To this end, it warned that the higher input costs could curtail manufacturing, while the higher inflation and weaker confidence levels could potentially restrain domestic consumption and investment.
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Going forward, MAS noted that the fallout from the Russia-Ukraine war will hit most of the external-oriented sectors in Singapore.
For instance, the semiconductor industry is expected to take a hit as Russia Ukraine are major suppliers of two crucial inputs – Russia produces 37% of the global supply of palladium while Ukraine supplies 70% of neon.
Singapore’s semiconductor may not feel the pinch as much since it imports palladium mainly from the UK and US. However, threesome of the palladium suppliers here may actually be importing from Russia, MAS pointed.
Meanwhile, the republic’s key electronics sector seems to be doing well, presumably because it is less reliant on oil and energy.
Overall, MAS is optimistic that the economic growth of Singapore’s key trading partners will be expansionary. "Demand in the advanced economies should stay well-supported by the buffer provided by household savings and wealth accumulated during the pandemic," it stressed.
