The Singapore economy is projected to slow further at a “below-trend pace” in 2023 amid growing challenges in the external environment, said the Monetary Authority of Singapore (MAS) on Thursday (Oct 27).
With that, overall labour demand “should soften somewhat” alongside a moderation in wage growth, the central bank added in its latest half-yearly macroeconomic review.
Advance estimates showed that the Singapore economy grew at 4.4 per cent on a year-on-year basis in the third quarter, just below the revised figure of 4.5 per cent in the previous three months. Growth was supported in part by industries which continued to benefit from the reopening of borders, CAN reported.
But moving forward, the significant tightening of global financial conditions and continued COVID-19 curbs in some countries are expected to weigh on growth in Singapore’s major trading partners.
This means that the country’s trade-related sector will continue to see subdued growth in the quarters ahead, the MAS wrote in its report.
“Dampened global and regional trade flows will adversely affect activity in Singapore’s manufacturing, wholesale, water transport and storage sectors, even as global supply frictions continue to ease,” it said.
Specifically, the global electronics industry, which enjoyed a strong post-pandemic demand surge until early this year, has seen its outlook deteriorate “rapidly” in recent months. Global chip sales contracted 3 per cent year-on-year between July to August, leading the industry into a “consolidation phase”.
For Singapore, end demand for electronics products has pulled back in the country’s top two markets –China and the United States – amid high inflation, tighter financial conditions and consumers pivoting to spending on services. Growth in investment demand for technology equipment in the US also “slowed considerably” since its peak last year, it said.
MAS added that a sharper decline in final demand moving forward “could presage an inventory correction of end-products, which would exacerbate the fall-off in sales of intermediate semiconductor inputs, and in turn worsen the oversupply of chips”.
Slowing external demand from heightened global inflation and tighter financial conditions will also continue to dent growth prospects in the financial sector.
In the near term, the outlook for the sentiment-sensitive segments within this sector – such as the fund management industry – is expected to be bearish, alongside further tightening moves by central banks globally, according to the report.
It is also a less rosy prospect for the travel and consumer-facing sectors, which should continue to recover next year, albeit with slower momentum as consumer sentiment could take a hit from inflation and an uncertain economic environment. In addition, unfulfilled pent-up consumption demand is likely to go towards overseas travel, rather than domestic spending.
Likewise for construction, labour shortages and elevated costs of construction materials will weigh on the outlook even as activity continues to pick up in 2023.
“Overall, GDP growth is likely to stay muted in the coming quarters,” MAS said, reiterating the official growth forecast for 2022 at a range of 3 to 4 per cent.
“Amid weaker external demand conditions, the economy is projected to slow further to a below-trend pace in 2023, dragged down by the trade-related cluster.”
Softer Labour Demand, Wage Growth
The moderation in global growth and tightening financial conditions will have “some impact” on labour demand, primarily in the external-oriented manufacturing and modern services sectors, MAS said.
“Notably, the slowdown in global manufacturing demand could act as a drag on the domestic sector’s workforce expansion, given the spillovers through worldwide supply chains, particularly in electronics production. Labour demand in external-oriented modern services could also ease,” it added.
But given the “significant wage flexibility” as well as underlying shortages for skilled workers, labour market adjustments in the external-oriented sectors “should largely take place via a downshift in job vacancies and wage growth, rather than by means of large-scale job losses”.
“Overall, given the starting point of a very tight labour market, there could be some scope for labour demand to weaken and job vacancies to fall without a significant rise in resident unemployment,” said MAS.
Firms will continue to hire non-residents to fill manpower gaps, particularly in sectors such as construction, marine shipyard and process. Together with moderating labour demand, excess labour market tightness should be further alleviated in the first half of next year.
Accordingly, wage growth is expected to moderate in 2023, but “remain slightly above pre-COVID rates”, it said.
“While labour supply constraints are projected to ease in the second half of 2022, they should continue contributing to above-average wage growth, as the effects of a tight labour market on nominal resident wage growth take about three quarters to be fully transmitted,” the report said.
Meanwhile, other factors, such as the progressive wage model for low-wage workers, will add “short-term boosts” to wage growth.
Inflation To Remain High
Turning to inflation, MAS reiterated its forecasts for core inflation, which excludes accommodation and private transport costs, to average around 4 per cent this year. Overall headline inflation should come in at around 6 per cent.
This is due to imported inflation likely remaining “significant” across a range of goods and services, while a tight labour market will continue to support firm wage increases.
Also, amid conducive demand conditions, businesses are expected to raise prices further to pass on the imported and domestic costs that have accumulated within production chains in Singapore and abroad.
Latest data showed Singapore’s core inflation rising further to 5.3 per cent in September, driven mainly by larger increases in the prices of food, services and retail and other goods. This is higher than the 5.1 per cent in August.
Headline consumer price index, or overall inflation, was 7.5 per cent year-on-year in September, unchanged from August.
Core inflation is expected to remain elevated in the first half of next year, before “moderating more discernibly” in the second half as cost pressures ease and demand conditions soften, MAS said.
For 2023, taking into account all factors including a hike in the Goods and Services Tax (GST), core and headline inflation are projected to average between 3.5 and 4.5 per cent, and 5.5 to 6.5 per cent respectively.
Excluding the effects of the GST increase, core inflation will come in at 2.5 to 3.5 per cent, while headline inflation is set to average at 4.5 to 5.5 per cent.
MAS reiterated that the cumulative effects of its five monetary policy tightening moves since October last year will help “ensure medium-term price stability as a basis for sustainable growth in the economy”.
