Singapore must transform for 'troubled environment', with risk of global recession in next two years: PM Lee

SINGAPORE cannot escape global headwinds from developments such as the Russia-Ukraine crisis, and must instead transform itself to make a living even in such circumstances, said Prime Minister Lee Hsien Loong, warning that soaring global oil prices may cost Singapore an additional S$8 billion a year, or 1.5 per cent of gross domestic product.

In the year ahead, Singapore must brace itself for persistently high inflation, the tightening of monetary policy by global central banks, and weaker global growth – with the possibility of a recession in the next two years, he said on Sunday morning.

At the National Trades Union Congress May Day Rally, held as a hybrid physical and virtual event, Lee noted that Singapore is emerging from the Covid-19 crisis after having averted the worst of its impact: "At the start of this year, we were cautiously optimistic about our post-Covid-19 recovery."

"But since the beginning of the year, the outlook has clouded, and the risks have grown considerably," he said. The Russia-Ukraine war continues with "no good outcome in sight", and the stakes are rising: the United States and Nato have stepped up military aid to Ukraine while Russia has made ominous pronouncements about the possibility of World War III.

Russia's invasion of Ukraine has also undermined the global order, representing "a flagrant violation of the UN Charter". It has made it extremely difficult, if not impossible, for countries to pursue win-win cooperation; and will further complicate already strained US-China relations, said Lee: "It will become harder for countries to remain friends with both powers."

The Russia-Ukraine war will further exacerbate the trend of countries pulling back from free trade, after Covid-19's disruptions had already prompted considerations of "re-shoring" supply chains for self-sufficiency, or "friend-shoring" to work only with trusted friends – making things harder for Singapore, with its heavy dependence on international trade and investment, said Lee.

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"More immediately, Singaporeans are already feeling the impact of the war on the cost of living," he said, noting that inflation was already a problem before the war, but has worsened due to the global energy crunch and disruption to food supplies.

The government is doing all it can to cushion the impact, with support for households, tighter monetary policy to reduce imported inflation, and efforts to secure food and energy supplies, he said.

But Singapore must be prepared for more economic challenges in the year ahead, he added: inflation remaining high, rate hikes in OECD countries, and weaker global growth. And as a price-taker, Singapore cannot avoid global headwinds.

When the oil price was around US$50 a barrel, Singapore's annual imports of crude oil and natural gas cost the country roughly S$30 billion a year, noted Lee. When oil prices doubled to US$100 per barrel, as has happened since the beginning of 2021, this doubled as well – meaning an additional S$30 billion each year.

Singapore can recover part of this because some of these imports are transformed here – refined, made into petrochemicals – and exported at a higher price, said Lee. But the rest is consumed here as energy, and the cost has to be borne by Singapore households, businesses, and the government, with the Ministry of Trade and Industry estimating this hit at around S$8 billion per year.

"There is no escape from this," he said, as government support helps in the short term but does not solve the problem in the long-term. The fundamental issue is higher energy and food prices; and the fundamental solution is to be more productive, transform, and grow the economy, so that incomes can go up, he said.

While Singapore will push back against deglobalisation and encourage constructive engagement between the US and China, there are limits to what Singapore can do, and these matters ultimately depend on the major powers themselves, said Lee: "Singapore has to take the world as it is, and develop a strategy that works for us in this troubled environment."

Larger countries can turn inwards, relying more on domestic markets and producing more onshore, even at an economic cost – but that is not a choice for Singapore, said Lee: "Our strategy can only be one – and that is to stay open, to make our economy stronger, more resilient, and to keep on seizing opportunities for growth, developing new capabilities and becoming a more competitive economy."

"Because if we do that, then despite the uncertain climate, despite the pressures against globalisation, investors will still find it worthwhile to put their projects in Singapore, our exports will still find foreign markets, and we can still earn a living for ourselves in the world."

Economic growth must also be matched by social and political cohesion, he added, noting that Singapore's tripartite partnership has made a big contribution to both the country's economy and its cohesion.

He cited the labour movement's involvement in several major policy changes, including the progressive wage model, the new Employment Pass framework, and changes to retirement and re-employment.

The labour movement is also deeply involved in economic transformation and improving productivity, he said. He gave three examples of firms that had overcome challenges by pivoting their business, rebranding to attract workers, or creating more flexible work arrangements.

Coincidentally, all three companies are led by women, he noted: "Maybe that's exactly what we need to drive change. It shows how much talent and potential we have in our workforce, and the women are half our workforce."

These are also three examples of union and management working together to transform businesses, he added – a demonstration of tripartism in practice, which is a huge competitive advantage for Singapore.

"Tripartism must always be a stabilising and anchoring force for Singapore," said Lee. Leadership renewal is crucial to this, he added, noting a recent major step forward on the political front, with Finance Minister Lawrence Wong being chosen to lead the fourth generation team.

"He will have to lead Singapore in a very different and uncertain world," Lee said, asking his audience of labour movement leaders and tripartite partners to give Wong and his Cabinet team their fullest support.

The imperative to transform has never been stronger, said Lee: "For us, change and transformation is an unending task, as we continually reinvent ourselves to maintain our place in the world. But having fought Covid-19 together, we can be confident of overcoming these challenges, and making the most of all the chances that will come our way."