Inflation may dampen Singapore shoppers’ sentiment, but no major hit to growth: analysts

RISING prices may prompt Singapore households to cut back on spending, but the overall impact on private consumption and the economy is likely to be limited, analysts told The Business Times.

That’s as some watchers remain optimistic about consumer demand from inbound tourists, and note the outward-oriented nature of Singapore’s trade-reliant economy.

Views are mixed on the impact of soaring inflation on domestic demand. Among those who see it taking a toll is UOB senior economist Alvin Liew, who said the bank’s recent downgrade of Singapore’s gross domestic product (GDP) growth forecast for 2023 – from 3.5 per cent to 2 per cent – reflects an uncertain external outlook and takes into account the impact of inflation on domestic private consumption.

“In a high-inflation environment driven by food, rental and energy costs, households will naturally divert their income to essentials and reduce spending on discretionary items such as holidays and recreational activities,” he told BT.

Maybank economist Lee Ju Ye similarly said that her team remains cautious on the retail outlook in the coming months, “as the surge in inflation and rising mortgage rates will likely result in some belt-tightening by consumers”.

“In particular, sales of discretionary items such as watches and jewellery and recreational goods may be the most affected,” she commented, while adding that the recovery in outbound travel may also result in more local dollars being spent abroad, compared with the year before.

Such belt-tightening would be in line with a straw poll by DBS in late May, which found that 64 per cent of respondents would adjust their spending habits in the next 6 months amid inflation. Some 74 per cent announced plans to “save more, spend less” and “look for cheaper alternatives”.

Rose Tong, executive director of the Singapore Retailers Association (SRA), said consumers will be more concerned with basic necessities such as food, utilities and fuel, adding: “Demand for general goods and services will decline and demand for luxury products may also level off.”

Tong expressed concern about the challenges facing retailers, which she said “will limit the expansion plans of retailers locally and overseas”, and warned of potential store closures.

But any potential pullback by consumers has yet to show up in Singapore’s economic data.

Member of Parliament Desmond Choo asked in Parliament on Jul 4 whether inflation has caused demand destruction in some consumption categories, and about its impact on business and investment.

Minister of State for Trade and Industry Alvin Tan replied: “Thus far, the higher inflation readings in recent months have not led to any significant cutback, at least in household consumption.”

Private consumption, retail, and food and beverage (F&B) sales indices also “point to firm consumption spending”, he added, citing a step-up in spending on F&B as well as shoes and clothes.

Retail sales have risen on both a nominal and real basis in recent months. The retail sales index rose by 17.8 per cent year on year in May at current prices, and by 14 per cent at constant prices – the fastest pace of inflation-adjusted growth in close to a year.

And other analysts and industry players do not expect inflation to result in a marked drop-off in demand.

On the consumer staples front, the DBS team said in its report: “Grocery companies could enjoy a second wind in their sails, with this heightened inflationary environment, as our survey reinforces our view that consumption remains resilient.”

As for big-ticket items, the Singapore International Jewellery Expo in mid-July is expecting “strong visitorship and robust sales”, said Edward Liu, managing director of events organiser Conference & Exhibition Management Services.

He told BT that consumers likely “would bring forward their purchases” ahead of planned hikes in the goods and services tax in 2023 and 2024.

Simone Ng, creative director at expo exhibitor Simone Jewels, added that some buyers may invest in jewellery as an inflation hedge: “The demand hasn’t been affected and we are expecting a good turnout with positive results at the show this year.”

“For retail sales, our view is that it is strong, and this is despite the higher inflation that we have been seeing today,” RHB senior economist Barnabas Gan told BT.

“More importantly, tourism levels should also return to near-pre-Covid-19 levels at the end of this year, and that is actually hand in hand with the recovery of the retail climate in Singapore.”

The SRA similarly hopes that the easing of international border restrictions and the pent-up demand for travel would “bring more tourists into Singapore to balance the anticipated levelling-off in demand (for) the non-essential goods”, said Tong.

Tricia Song, head of research for South-east Asia at real estate consultancy CBRE, said that “consumption could remain strong for the time being”, based on on-the-ground experience.

“In the event of an economic downturn, necessity retail will be more defensive than discretionary retail, and suburban malls will likely outperform Orchard malls. However, this is not our base case now, given the impending return of tourists and pent-up demand,” she elaborated.

Watchers also noted that private consumption makes up a relatively lower share of Singapore’s GDP – 31.0 per cent in 2021 – compared with economies such as the United States.

Granted, Liew from UOB noted that the share of the GDP from private consumption still “is material”, and “will have an impact on growth if consumption demand weakens”.

But “Singapore’s external-facing industries are the ones that will make or break the economy”, said Gan, as he rebuffed the notion that inflation has led to any significant downturn in the retail sector as yet.

“We’re not even looking for a dent in consumption this year… At least from the high-frequency, real economy point of view, we are doing okay. We are doing well, in fact.”