Singapore’s economy is expected to grow at a moderate pace in 2023, with inflation moderating but still likely to be elevated in the near term, say economists at the Asean +3 Macroeconomic Research Office (AMRO).
As such, the macroeconomic watchdog says that maintaining a tight monetary policy stance is critical to anchor inflationary expectations while the government provides targeted fiscal support to alleviate the increase in the cost of living.
These insights are part of AMRO’s 2023 annual consultation report on Singapore, based on the organisation’s visit to Singapore from May 9 to June 5, with data and information available up to June 16.
AMRO is an international organisation focused on the macroeconomic and financial resilience and stability of the Asean+3 regions, which includes 10 members of the Association of Southeast Asian Nations (Asean) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members.
On the nation’s economic developments and outlook, AMRO notes that Singapore’s economy slowed sharply from 3.6% to 0.4% y-o-y in 1Q2023 driven by a sharp decline in manufacturing output. The manufacturing sector contracted by 5.4% y-o-y in 1Q2023, reflecting a cyclical downturn in the electronic cycle.
Meanwhile, the service sector remained strong due to the return of tourists and a “relatively resilient” private consumption. The construction sector continued to recover as the return of foreign workers, following the reopening, eased the supply constraint, they note.
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Inflation stood at 6.1% in 2022, on the back of high energy and food prices and higher costs of transportation and accommodation. Although inflation has moderated in recent months, it is expected to remain elevated in the near term, as service inflation has been gaining momentum in recent months, reflecting a relatively tight labour market.
Amid heightened inflationary pressure and rising global interest rates, Singapore’s monetary policy was on a tightening trajectory in 2022 before taking a pause in April this year due to concerns over the weakening economy. Meanwhile, domestic interest rates have been trending upwards in tandem with global interest rates.
The revised FY2022 fiscal position improved slightly relative to the estimated position, mainly due to higher-than-expected operating revenue. The FY2023 budget shows a tighter fiscal stance, in which the deficit is expected to narrow to 0.1% of gross domestic product (GDP) from 0.3% a year ago. This reflects the government’s anticipation of growing expenditure needs in the medium to long term, amid inflationary concerns and ageing population, according to the economists.
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AMRO highlights further risks, vulnerabilities and challenges for Singapore, including a gloomier global growth outlook as one of the major risks in the coming quarters.
“While the reopening of China had initially provided a much-needed boost to global demand, it will unlikely be sufficient to offset the impact of the tighter financial conditions in major economies on global growth, which will weigh heavily on Singapore’s manufacturing exports,” they note.
In addition, elevated price pressure poses another challenge in the near term. A sharp rise in commodity prices looms as a key external risk amid heightening geopolitical tensions and the El Nino weather condition. On the domestic front, car ownership fees, accommodation costs, wage pressure, and goods and services tax (GST) hikes warrant monitoring.
On the financial front, spikes in capital flow volatility are a key risk for Singapore. Meanwhile, most households and firms remain resilient to an increase in loan rates, although risks for a small segment of highly leveraged households and firms have heightened amid higher interest rates.
“Over the longer term, Singapore will need to contend with challenges arising from an ageing population and climate change,” the economists say.
Finally, AMRO says that the revenue measures in the FY2023 budget are commendable, and it encourages the authorities to explore additional revenue sources to meet rising longer-term spending needs while adhering to the fiscal rule of running a balanced budget within each term of government.
It supports the Monetary Authority of Singapore’s tightening monetary policy to maintain price stability, but adds that a concerted effort involving monetary and other policy instruments, should be made to tame inflation, particularly when the inflationary pressure is being driven by a wide range of supply and demand factors, including domestic policy measures.
It supports the current macroprudential measures to cool the property market, in which recent rounds of cooling measures have reduced the risk of a destabilising correction. “Continued vigilance on property market developments is essential, as are efforts to boost private and public housing supply,” they note.
Finally, AMRO says the government’s efforts to strengthen digital infrastructure will foster collaboration between fintech companies and other businesses, and help promote greater interoperability across platforms and countries. AMRO also welcomes the authorities’ initiatives to mobilise private capital to catalyse the region's transition toward a low carbon economy.
