After seeing a turnaround in its economy with a growth rate of 7.6% in 2021, the worst seems to be over for Singapore. The little red dot’s econo- my looks to be on track to continue expanding in the coming quarters despite the ongoing war between Russia and Ukraine and the resultant impact on global supply chains.

The optimism follows a massive easing of domestic safe management measures and border restrictions as the republic moves towards treating Covid-19 as endemic, the Monetary Authority of Singapore (MAS) highlighted in its half-yearly macroeconomic review on April 28.

Starting from April 26, caps on group sizes for mask-off activities were removed while the need for a one-metre safe distance between groups is no longer needed. Additionally, workplaces are now allowed to have all their staff back at the office.

The recent easing of restrictions has been welcomed by business owners and consumers alike. A 34-year-old civil servant who wants to be known as AB says that the removal of group sizes means that he can now finally meet friends and family whom he has not seen in the past two years. “It was a long time coming. I hope that the infection count stays low so we don’t have to go back to a state of lockdown or heightened alert,” he tells The Edge Singapore.

Agreeing, Nat, a chef at Italian restaurant La Pizzeria, says that the latest slew of measures will benefit F&B establishments, many of which saw a substantial drop in their profits due to the restrictions. “A lot of us were struggling. So with no limit now, we are looking forward to having my customers,” she says.

It is thus not surprising that MAS believes that “domestic demand, particularly private consumption as well as public infrastructure investment would be the main source of [Singapore’s] growth in 2022”.

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“The drivers of growth should broaden to the domestic-oriented and travel-related clusters over 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,” the government body adds.

It now forecasts a revival in the retail and travel-related sectors in 2Q2022, earlier than the 2H2022 initially expected.

Even so, the central bank is maintaining its forecast for Singapore’s GDP growth at 3% to 5% this year, barring an escalation in tensions between Russia and Ukraine as well as a deterioration in the Covid-19 crisis. The target range also marks an above-trend growth rate for the second consecutive year.

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However, businesses are already bracing themselves for challenges ahead. The Business Optimism Index compiled by the Singapore Commercial Credit Bureau edged down slightly for 2Q2022 to 5.35% from 5.91% in the previous quarter. A key concern cited was the geopolitical uncertainty from the Russia-Ukraine war and its exacerbating risks of disruptions to global supply chains.

Price pressures While Singapore and the rest of the world are looking forward to a world without safe management restrictions, rising inflation levels remain a worry. Again, the Russian-Ukraine crisis has affected global supplies and the prices of commodities.

“Thus far, the main impact on the global economy has come through a sharp rise in global commodity prices, particularly in energy, fertilisers, nickel and grains, reflecting Russia and Ukraine’s significant role in the supply of those products,” notes MAS.

The central bank cautioned that the supply-driven price shocks are now eroding real incomes and could potentially depress demand for goods and services as well as investment flows.

Global inflation is expected to climb to 4% this year — the highest since 2008 — before easing to 2.2% in 2023 as “supply challenges are addressed and major central banks withdraw policy accommodation”.

In particular, price pressures have taken hold “more firmly” in the G3, which includes the Eurozone, Japan and the US, MAS says, noting that inflation averaged 6.8% y-o-y in 1Q2022, the highest since 1982.

Being an export- and import-oriented economy means that Singapore is highly susceptible to the inflation levels of its trading partners. It is thus not alarming that the core inflation price gauge, which measures the total level of inflation excluding that for accommodation and private transport, hit a 10-year high of 5.4% last month. It is not expected to remain significantly higher than the historical average of around 1.6%.

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Consumers are already feeling the pressure of higher prices. For instance, Grab driver Allan Ang noted that a $50 note “gets you very little things” at the supermarket today than it used to, say, five years ago. “We are not even buying unnecessary things. It is like the prices have gone up a lot in just the past few months. I must work harder to be able to afford things now,” he sighs.

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.

A bid to curtail a further surge in prices triggered a monetary policy tightening by the central bank earlier this month. This is the third time it is doing so since its policy meeting in October 2021.

Nicholas Mapa, senior economist at ING, reckons that the MAS “could resort to additional off-cycle adjustments” should core inflation threaten to bust the ceiling of the central bank’s latest  forecast range.

However, another cause for concern is that price gains are outpacing wages for most households, even as wage pressures “will eat into business profit margins and may force some firms into financial distress” despite a post-pandemic reopening, Maybank Kim Eng’s economists Chua Hak Bin and Lee Ju Ye note.

“Currency appreciation may not be sufficient to contain the intensifying inflation pressures nor ease the tightness in the labour market,” they stress. The duo reckons that Singapore may have to defer manpower policies that will curb foreign worker inflows and raise local salaries, and “a supplementary Budget may be necessary to ease the burden from the rising cost of living for lower-income households”.

Still, MAS points out that even as 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”.

“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,” it adds.

As a result, the central bank warned that the higher input costs could curtail manufacturing, while the higher inflation and weaker confidence levels could potentially restrain domestic consumption and investment.

Looking ahead, MAS notes 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 and Ukraine are major suppliers of two crucial inputs — Russia produces 37% of the global supply of palladium while Ukraine supplies 70% of neon.

However, it seems like major global chip companies such as Micron, UMC and GlobalFoundries, which have production presences in Singapore, have thus far indicated limited disruptions as they have stockpiled raw materials and diversified sourcing since Russia’s annexation of Crimea in 2014, MAS highlights.

Singapore’s semiconductor may not feel the pinch as much since it imports palladium mainly from the UK and US. However, three of the palladium suppliers here may be importing from Russia, MAS points out.

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 stresses.

Easing of restrictions brings cheer to economy but rising inflation remains a challenge

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