Trade war, mature cycles could be a drag in next few quarters

Singapore

SINGAPORE'S economy has yet to take a hit from the ongoing US-China trade war, but it could soon bear the brunt of it in the latter half of 2018 and beyond, the Monetary Authority of Singapore (MAS) said in its half-yearly macroeconomic review on Friday.

Trade tensions, coupled with the maturation of global economic and tech cycles amid tightening global financial conditions, could potentially be a drag on Singapore's growth in the next few quarters, it added. Nonetheless, the MAS still maintained that the economy is on track to expand at a "slower but still firm pace" for the rest of this year and in 2019.

Barring a materialisation of downside risks, growth is expected to come in within the upper half of the 2.5-3.5 per cent range in 2018, before moderating slightly next year. Despite the trade spat, economists noted that the central bank seemed to strike a positive note on Singapore's growth prospects, buttressing its decision earlier this month to tighten monetary policy for the second time this year.

OCBC economist Selena Ling said: "The trade war is still the biggest risk on the horizon, but the central bank seems fairly confident on the growth front. It seems to imply that any knockdown from the trade war is still manageable."

Maybank Kim Eng economist Chua Hak Bin concurred that the review seemed to indicate MAS believes Singapore's growth will "hold up pretty well".

Even as the Singapore economy continued to expand at a "creditable" clip in recent quarters, the central bank acknowledged that economic uncertainties have risen since its last review in April.

"Although there has been détente between the US and several of its trade partners, trade tensions remain at the forefront of considerations for global growth prospects," it said.

According to the MAS, the first round of tariffs in July caused "no significant deterioration" in Singapore's exports to China via the indirect trade channel, with exports of tariff-affected products to China already on the decline due to the slowdown in the Chinese economy. But this could change in the coming quarters, with the magnitude differing across industry segments depending on the extent of linkages, noted the central bank.

On a brighter note, there could also be marginal positive spillovers to Singapore as firms reconfigure supply chains and relocate production facilities to South-east Asia in the wake of the trade war.

In particular, trade-related services such as wholesale trade and transportation & storage could get a boost, on the back of Singapore's status as a hub.

With the lingering uncertainties on the trade front, Singapore's growth drivers also look set to shift.

The MAS said the contribution of the electronics and trade-related sectors - which have been the main pillar of growth - is likely to ease, in tandem with the peaking of the global electronics cycle.

Singapore's growth will be increasingly supported by modern services, as digitalisation and innovation continue. Within the cluster, the strong growth momentum of digital-related activities, comprising IT & information and consulting services, as well as the financial sector, is expected to be sustained.

However, the MAS flagged that the financial sector could still be weighed down by cyclical headwinds.

"Already in 2018, worsened global financial jitters have caused a rout in emerging market assets - the MSCI Emerging Market Index declined by more than 10 per cent over Jan-Sept 2018," it noted.

As such, the performance of Singapore's fund management segment in 2017 is unlikely to be repeated this year, while sentiment-sensitive segments such as securities dealing and forex trading could also be affected, the MAS said.

Domestic-oriented industries could also see an uplift from a sustained improvement in the labour market, but the uptick will be uneven due to ongoing structural adjustments.

The central bank also appeared positive on the labour front. It said several forward-looking indicators, such as job vacancies and hiring outlook surveys, suggest that manpower demand will increase.

As slack in the labour market has been absorbed, wage growth is expected to go up from last year, said the MAS.

With the labour market showing improvements, core inflation will also experience modest, continuing pressures.

However, the central bank said that core inflation - a key consideration for its policy moves - will be significantly influenced by three main categories in the coming quarters: oil-related, water and public road transport.

In particular, oil-driven price increases will continue to push up core inflation, keeping it at around 2 per cent for the rest of the year and in the first half of 2019.

Overall, core inflation is expected to come in within the range of 1.5 to 2 per cent in 2018, and 1.5 to 2.5 per cent next year.

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