As growth slows but inflation stays high, all eyes on MAS’ next moves

WITH Singapore’s growth set to slow in 2023 even as inflation remains high, economists are split on whether the Monetary Authority of Singapore (MAS) will press on with further monetary tightening moves to control inflation or begin to loosen its grip so as to not hurt growth.

“They’re in a tricky situation, to be honest. There’s not an obvious one way to go,” said Oxford Economics senior Asia economist Alex Holmes.

“Yes, inflation is going to be high, and take a while to come down, but equally, they’ve got to keep one eye on the economy and not have policy too tight such that it makes the slowdown slip into something more nefarious,” he added.

The official gross domestic product (GDP) growth forecast range for 2023 is between 0.5 per cent and 2.5 per cent, slowing from this year’s growth of 3.8 per cent, according to advance estimates released on Jan 3.

Private-sector economists similarly expect Singapore’s economy to grow 1.8 per cent in 2023, showed the latest MAS survey of professional forecasters on Dec 14 last year.

The forecasts of 25 economists ranged from -1.1 per cent or less per cent to 5.5 per cent or more, with the highest probability – a third – assigned to the range of 1 to 1.9 per cent, which also falls within the official forecast.

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Higher inflation for longer

Singapore’s inflation reached decade-long highs in 2022, and is expected to stay elevated for at least the first half of 2023, with full-year inflation also expected to be above trend.

“The inflation narrative this year shifted quickly,” noted Rong Ren Goh, fixed income portfolio manager at Eastspring Investments. Earlier in the year, high inflation was expected to be transitory – but Russia’s war in Ukraine began, causing a spike in energy and grain prices.

This subsequently filtered through the rest of the economy, prompting growing acceptance that inflation would be “more durable than originally thought”, he added.

Singapore’s core inflation is expected to stay elevated at least for the first half of 2023, and will only ease “more discernibly” in the later half of the year, said the MAS in its last half-yearly macroeconomic review last October.

The central bank projects that core inflation – which excludes accommodation and private transport costs – will come in between 3.5 per cent and 4.5 per cent in 2023, with headline inflation coming between 5.5 per cent and 6.5 per cent.

One consideration for the inflation outlook is the upcoming goods and services tax (GST) hike, which will cause core inflation to rise in the first quarter, though MAS expects the impact to be temporary.

Excluding the effects of the GST increase, core and headline inflation are expected to average 2.5-3.5 per cent, and 4.5-5.5 per cent respectively in 2023.

Moody’s economist Denise Cheok believes high oil prices may start to dissipate by mid-2023, while elevated food prices could persist due to “logistical disruptions and unpredictable weather conditions significantly influencing the food supply chain”.

Eastspring’s Goh also expects energy prices to remain capped into 2023, as demand for energy wanes amid the global growth slowdown. But unlike Cheok, he expects food prices to ease as well, with input costs no longer being pushed up as much by supply-side disruptions.

Economist Intelligence Unit principal economist Fung Siu said wage-related price pressures in the services sector are likely to linger as it plays catch up after the pandemic and adjusts to high operating costs.

Wage inflation could also prove stickier, said BNP Paribas’ Asia FX strategist Michael Loh. “This may be a bigger concern for policy makers as firmer wage growth may support a higher level of underlying inflation, warranting further tightening to cool the economy.”

More tightening ahead?

Against the backdrop of high inflation but slowing growth, MAS will have to “calibrate policy to carefully balance growth and price stability”, said Eastspring’s Goh.

In response to rising inflation, MAS moved to tighten monetary policy four times in 2022, including two off-cycle moves in January and July.

But private-sector economists are split as to whether there will be further tightening – including off-cycle moves – in the new year. Some do not rule out further off-cycle moves that come as soon as January, while others believe that MAS is likely to resume its regular two-meeting schedule and may even hold steady then.

Apart from MAS’ adjustments to exchange rate policy, Singapore will also feel the effects of higher global interest rates as an interest-rate taker.

Analysts expect the US Federal Reserve to persist with interest rate hikes and to only pause once red-hot inflation is kept in check, which they predict will be mid-2023.

“Central banks around the globe will likely follow suit and start to pull back around the same time,” said Moody’s Cheok.

While central banks have already started to slow the pace of monetary tightening, with the Fed delivering a smaller hike of 50 basis points in December, they may tighten for longer to reach higher terminal rates, noted BNP’s Loh.

Central banks are also unlikely to start pulling back interest rates right away, with rate cuts only expected from 2024, he added.

One group which would feel the impact of higher rates is businesses. Rising rates would put pressure on businesses with existing loans to service, and may restrict their willingness to take new loans for expansion.

Another is the residential property market, which is financed significantly by mortgages, said Eastspring’s Goh.

“Besides crimping demand for residential housing through reduced affordability, higher interest rates can only reduce the disposable income of households servicing their mortgages, which can dampen consumption and domestic demand,” he added.

But Jonathan Denis-Jacob, director and head of advisory and consulting at Colliers Singapore, argued that this is less likely to be the case in Singapore, given the current tight market conditions, including limited supply and unsold inventory both in the primary and secondary markets. Even if demand were to cool due to rising rates, it will only be temporary.

Private property prices have recorded steady growth of above 7 per cent since the start of 2022, and the rental market has registered “even more spectacular growth” amid record-low vacancy rates, he said.

In addition, Singapore households continue to have strong balance sheets and use a relatively low share of their total income on mortgage payments. “Even with rising financing costs, Singapore households are likely to have some room in their budget to weather the additional interest costs,” he said.

Nevertheless, the rate hikes could still further accelerate rental demand growth, said Denis-Jacob, as some buyers may delay their purchase until there is more certainty on the interest rate trajectory and increased supply.

Two-speed economy

Singapore’s current two-speed economy – with externally-oriented sectors contracting while tourism and consumer-facing sectors expand – could become more stark in the coming year, said Maybank economists Chua Hak Bin and Lee Ju Ye in a research note.

The recovering services sectors are expected to help buoy the slowdown in outward-oriented sectors like manufacturing, which contracted for the first time in 13 months in October and is expected to weaken further.

But the services recovery could run out of steam towards the second half of 2023, said DBS analysts Irvin Seah, Philip Wee and Eugene Leow in a research note.

For one thing, the existing manpower crunch would put a lid on the near-term prospects of the cluster, they said. The effects of a weakening global economy could also spill over to the domestic economy, impacting IT and business services.

A slower growth outlook may finally cause an easing of tight labour market conditions and exert downward pressure on wage growth, but also weaken discretionary spending. “In turn, a potentially weaker consumption demand will start to take a toll on some domestically-oriented services,” they added.

One silver lining is China’s unexpected decision to reopen its borders from Jan 8, which could help to offset some of the impact of slowing growth, noted economists. But it is difficult to quantify the impact on growth at this juncture, said UOB senior economist Alvin Liew.