SINGAPORE: Given rising global uncertainties such as trade tensions, the Singapore economy will likely expand at a slower pace for the rest of the year and in 2019, the Monetary Authority of Singapore (MAS) said in its latest biannual macroeconomic review released on Friday (Oct 26).
Still, growth is expected to be "enduring" amid factors such as the modern services cluster playing a bigger role in supporting the economy, the central bank added in the 115-page report.
“Barring a significant setback in global growth, the Singapore economy is likely to expand at a slower but still firm pace for the rest of this year and in 2019,” it wrote.
Referring to the official forecast that tipped 2018 growth to be between 2.5 and 3.5 per cent, MAS reiterated its expectation for the full-year figure to come in within the upper half of the range, before moderating slightly in 2019.
ECONOMY RESILIENT THUS FAR BUT UNCERTAINTIES HAVE RISEN
In its report, the central bank said the Singapore economy has held steady against global headwinds thus far with continued expansion at a “creditable pace”.
Gross domestic product (GDP) grew by an average of 3.4 per cent year-on-year in the second and third quarter of 2018, slightly lower than the 4.1 per cent from the previous two quarters, it noted.
This comes amid firm growth in the modern services cluster – supported by robust demand for financial services – even as the trade-related cluster slowed alongside the waning of the IT upturn.
The trade spat between the United States and China also had a “limited impact” thus far, MAS said.
The first round of tit-for-tat tariffs implemented in July has caused “no significant deterioration” in Singapore’s exports to China via the indirect trade channel. In fact, exports of tariff-affected products to China were already on the decline due to the slowdown in the Chinese economy, it added.
However, the central bank acknowledged that the global economic outlook has become more uncertain since its last review six months ago.
For one, economic and financial vulnerabilities in emerging markets have increased amid tightening global financial conditions. This has sparked capital outflows from these economies, which could dampen consumer and business sentiment, MAS said.
Trade frictions, which have “risen in scale and intensity” between the world’s two biggest economies over the past months, and the resulting uncertainty could also “weigh more discernibly on economic activity” moving forward.
Taken together with the “coincident maturation of both the global economic and tech cycles”, MAS said these could pose some downside risks to growth in the quarters ahead.
Specifically on trade, the impact via the indirect trade channel could become more evident in the coming quarters, though the magnitude will differ across industry segments depending on their links with China.
Within domestic exports, the electronics segment may be impacted as both Singapore and China are key nodes in the global supply chain, the central bank noted. About half of the trade value of Chinese electronics exports to the US is now subject to higher tariff rates.
Meanwhile, trade-related services, such as wholesale trade and transportation and storage, could also feel the heat due to the significant role they play in trade intermediation.
The MAS report cited the Organisation for Economic Co-operation and Development’s (OECD) trade in value added data, which showed Singapore’s economic links with China being more services-driven with about 60 per cent of the country’s value added in Chinese exports coming from the services sector.
“Although Singapore’s trade data has not shown any discernible effects from the restrictive trade actions implemented thus far, the negative spillovers are expected to impact the Singapore economy in the latter part of this year and beyond,” MAS said.
To be sure, the central bank added that some of this impact could be mitigated by the diversion of trade flows and production from China to Southeast Asia.
“The relocation of production to Southeast Asia, if sustained, could yield some positive spillovers, at the margin, to Singapore. In particular, trade-related services such as wholesale trade and transportation and storage could benefit due to Singapore’s hub status,” it wrote.
Meanwhile, the modern services cluster is set to contribute more significantly to overall GDP, with continued support from digitalisation and innovation trends.
The sustained improvement in the labour market should also boost domestic-oriented industries, MAS said, though the “uptick will be uneven because of ongoing structural adjustments”.
LABOUR MARKET, INFLATION OUTLOOK
Turning to the outlook of the labour market, the central bank said a broad range of indicators suggest that labour demand has strengthened further, especially in modern services. The slack in the labour market has also been absorbed, it added.
This means that wage growth is expected to strengthen from last year, “providing an impetus to domestic price pressures towards the end of this year and into the next”, MAS said.
Friday’s report comes two weeks after the MAS tightened monetary policy for the second time this year.
It reiterated the central bank’s expectations for core inflation to edge up to around 2 per cent for the rest of the year given oil-driven price increases.
Overall, core inflation – a key consideration for the MAS’ monetary policy moves – is expected to come in between 1.5 and 2 per cent for the whole year, before averaging between 1.5 and 2.5 per cent next year.
Amid sustained GDP growth and improving labour market conditions, the central bank said modest cost pressures are accumulating in the Singapore economy and “should pass through to prices at a steady, but contained, pace”.
With core inflation expected to be just under 2 per cent in the medium term, it noted that “a further withdrawal of policy accommodation was assessed to be appropriate to ensure medium-term price stability”.