Uncertainty, financial stability tail risks have risen globally and for Singapore: MAS

UNCERTAINTY and financial stability tail risks have increased both globally and in Singapore with the rise in global interest rates, the Monetary Authority of Singapore (MAS) said in its half-yearly macroeconomic review on Wednesday (Apr 26).

But it added: “For now, the swift and proactive response by policymakers to emerging vulnerabilities has been sufficient in preventing further downside risks from being built into the baseline.”

Monetary tightening is expected to cause both global growth and inflation to slow. MAS expects the global economy to grow 2.8 per cent, down from 3.3 per cent last year.

This slowdown will be primarily led by a slower 0.6 per cent growth in the G3 – the eurozone, Japan and the United States – down from 2.4 per cent last year. MAS noted that the US is expected to fall into a brief technical recession later this year, an assessment that economists have said is unsurprising.

While China will be an exception as its economy rebounds with the country’s reopening, this boost to Asian exports is not expected to offset the negative impact of weaker demand from advanced economies, said MAS.

OCBC chief economist Selena Ling considers this view conservative “but probably correct”, given the uncertainty over the sustainability of China’s recovery and whether it would translate into domestic and overseas travel and consumption. Bilateral trade between China and Asia is also still closely correlated to the global economic cycle, she added.

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ANZ head of Asia research Khoon Goh noted that China’s rebound has so far been about services and domestic consumption, with “very little import content”.

“Only when China’s recovery broadens to include a recovery in the property sector and investment generally will we start to see the effects transmitting through to the rest of the region. This is likely in the second half of the year,” he said.

If the boost from China’s reopening remains limited in the second quarter, Singapore may slip into a technical recession, said Maybank senior economist Chua Hak Bin.

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For Singapore, MAS maintained its forecast for gross domestic product to grow 0.5 to 2.5 per cent this year, moderating from 3.6 per cent in 2022, but added: “The near-term outlook remains uncertain and fragile, with risks to growth skewed to the downside.”

The broadening downturn in the global electronics industry and the recent banking stresses in the US and Europe have dampened Singapore’s growth prospects, given the Republic’s relatively large exposure to the tech and finance sectors, it said.

Repeating an earlier warning about how “disorderly market adjustments and the exposure of latent vulnerabilities among corporates and households could increase financial stability risks”, MAS also flagged the danger of contagion from banking pressures.

“Should other latent vulnerabilities in the global financial system manifest in the coming months, consumer and investor confidence will take a further hit, with wider adverse implications for the economy beyond the current manufacturing-led downturn,” it said.

A contagion in financial markets could exacerbate the current trade downturn, with spillovers to domestic services, “thus dampening or even eliminating any recovery in the second half of the year”.

Economists said Singapore’s financial system is sound and has seen limited impact from the banking troubles in the US and Europe, but a worse-than-expected global downturn could weigh on both business and domestic confidence here.

“While the domestic property market may potentially see some deflation or at least some moderation in the pace of price increase, which is already happening, macroprudential measures suggest that downside risks should be contained,” said OCBC’s Ling. “The corporate sector, especially SMEs (small and medium enterprises) or firms that are more leveraged, may face more challenging times since they’re already grappling with elevated costs.”

ANZ’s Goh added: “Households and businesses here are still facing higher debt service costs, which while manageable at present, could become more of an issue if domestic growth slows, leading to declines in profitability or job losses.”

Maybank’s Dr Chua noted that Singapore’s system-wide loan growth is already contracting, reflecting weak business and investment demand.

As for the labour market, the pandemic recovery is “broadly complete” but softening external demand is now expected to cause easing in labour market tightness and wage growth.

While unemployment rates remain below the pre-Covid-19 average, MAS noted nascent signs that labour market tightness has begun to ease. These include a decline in job vacancies and slowing labour market churn at the end of last year, indicating that job-hopping to higher-wage positions may have slowed.

There was also a slight pickup in retrenchments, as well as in employees placed on short work-week or temporary layoff in the fourth quarter, reaching levels similar to the pre-pandemic average.

In Q4 last year, there were early signs that external headwinds had dampened employment growth in the trade-related and modern services clusters, said MAS.

Only the domestic-oriented cluster saw a step-up in manpower growth in Q4, as sales and activity approached pre-pandemic levels in retail trade, food and beverage services, as well as other community, social and personal services. In contrast, the construction sector saw a significant slowdown in headcount growth as the labour crunch eased.

For 2023, job creation in the more labour-intensive domestic-oriented and travel-related clusters is expected to offset the hiring slowdown and pockets of retrenchments in the trade-related and modern services clusters, MAS said. This means the aggregate resident workforce should continue expanding, albeit at a slightly more modest pace compared with last year.

It still expects the labour market to remain at full employment conditions through 2023, given its very tight starting point.

“The efficiency of matching job vacancies to jobseekers, which had fallen over the past few years, should also recover alongside increases in non-resident employment and job transformation efforts,” MAS said.