Global recovery on track from Q2; Singapore could exceed 6% GDP growth in 2021: MAS

THE world economy is on track to pick up pace from the second quarter of this year, about half a year after a resurgence in Covid-19 infections set back recovery, according to April's Macroeconomic Review released on Wednesday.

"The global economy is estimated to have slowed to a near-standstill in Q1 2021, with several economies expected to have contracted due to retightening of mobility restrictions," the Monetary Authority of Singapore (MAS) said in the review.

Even so, the global economy is projected to regain its end-2019 level of output by Q2 and expand by 6.2 per cent for the year as a whole, it said.

This is due to the substantial fiscal stimulus expected to take effect in several economies, including the US, alongside a faster-than-expected rollout of vaccination programmes.

The combination of these two developments has also helped to boost business and consumer confidence in the near to medium-term outlook, MAS said.

Over time, the relationship between the response to Covid-19 and economic activity is expected to become more muted, MAS said, as firms and individuals accumulate experience in terms of how to operate during a pandemic.

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In Singapore, economic growth momentum has eased in the recent two quarters following a strong rebound in Q3, but near-term economic prospects have strengthened on the back of firming external demand, MAS said.

The central bank is expecting Singapore's gross domestic product (GDP) to exceed the upper end of the official 4 to 6 per cent forecast range, barring a significant setback in activity from a weaker recovery of the global economy or surge in locally transmitted cases.

However, the projected growth outcomes for different sectors have become "more disparate than previously envisaged", MAS said.

Prospects for sectors less affected by the pandemic, especially manufacturing, have brightened, with electronics production likely to lead the way for manufacturing's strong growth this year.

At the same time, the construction sector should be supported by the backlog of projects held back by Covid-19, although the shortage in foreign construction workers could continue to hamper the industry.

Meanwhile, the prognosis for the worst-hit sectors, including air transport and accommodation, has deteriorated with the global surge in cases and diminishing hopes of a substantial border reopening in the near term.

"Accordingly, Singapore's air transport industry is expected to continue operating at less than half of pre-Covid-19 levels even by year-end. At the same time, domestic tourism will provide a thin lifeline to the accommodation and arts, entertainment and recreation industries, but revenue from such a short-term pivot will not be sufficient to compensate for the diminution of international travel," MAS said.

Even so, the improving labour market conditions and consumer sentiment could boost the retail and food and beverage sectors, MAS said.

The authority noted that policy support for resident workers likely facilitated the continued strong recovery of resident employment in Q4, and recovery should continue at a steady pace in the quarters ahead.

As labour demand recovered, the overall slack in the domestic labour market continued to decline in Q4, MAS said.

However, data suggests that the labour market still has some degree of spare capacity, it added, and resident unemployment has also stayed elevated even though it has eased from its peak in September.

Both core and headline inflation rose slightly in Q1, as government measures that have dampened essential services inflation for most of 2020 ceased to do so this year.

While inflation is expected to rise in the months ahead, the increases mainly reflect the sharp recovery in global oil prices and low-base effects from the fall in prices in Q2 2020, MAS said.

The pace of increase in inflation should ease in the second half of this year, reflecting "still-contained external and domestic cost pressures", it said.

MAS is expecting core inflation to average between 0 and 1 per cent, while headline inflation is forecast to come in between 0.5 and 1.5 per cent this year.

Business cost pressures are also expected to remain contained, MAS said.

While resident wages are expected to grow at a slightly faster pace this year, the elevated resident unemployment rate and some degree of latent labour market slack should restrain overall wage cost pressures, it noted.

Accordingly, the central bank kept its neutral stance on the Singapore dollar nominal effective exchange rate (S$NEER) in its Monetary Policy Statement on April 14.

It said an accommodative monetary policy stance remains appropriate and will complement strong fiscal policy in supporting the narrowing negative output gap while ensuring price stability over the long term.