Singapore Central Financial institution sees weak development and decrease inflation in 2023

A staffer counts Singapore dollar banknotes at Raffles Place financial business district in Singapore October 6, 2022. (Photo by Roslan RAHMAN/AFP) (Photo by ROSLAN RAHMAN/AFP via Getty Images)

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Singapore’s central bank said the country’s gross domestic product is expected to “decrease significantly” this year and that growth prospects have “clouded” this year.

That comes as the economy grew 0.1% year-on-year in the first quarter, according to the Department of Commerce and Industry’s GDP advance estimates. However, compared to the previous quarter, GDP contracted by 0.7%, the first contraction since the second quarter of 2022.

MAS said global economic activity was “slightly more resilient than expected” in the first quarter of 2023, with the decline in global energy prices, strong consumer demand in advanced economies and the lifting of pandemic restrictions in China.

However, tighter global financial conditions are expected to put additional strain on global investment and manufacturing. MAS also sees the surge in demand from reopening in most regional economies fading as the year progresses.

Limited boost from China reopening

While China’s reopening is relatively recent, Singapore’s central bank expects the mainland’s recovery to be largely consumption-driven and focused on the domestic services market.

The MAS said “growth in Singapore’s key trading partners will be slower in 2023, below the pace of the previous two years.”

Singapore’s trade-related cluster is expected to shrink further and domestic growth is expected to moderate as higher consumer prices and interest rates restrain spending. The MAS expects GDP growth of between 0.5% and 2.5% in 2023, compared to growth of 3.6% in 2022.

Singapore’s manufacturing sector accounts for most of its GDP at 21.6% of nominal GDP in 2022. According to the Department of Commerce and Industry’s release, the sector shrank 6% year-on-year in the first quarter, steeper than the 2.6% year-on-year decline in the previous quarter.

On a quarter-to-quarter basis, the sector shrank 5.2% in the first quarter, a reversal of the 1% expansion seen in the fourth quarter of 2022. The ministry noted that all manufacturing clusters except transportation saw output contractions.

MAS stops the tightening cycle

On Friday, the MAS also announced that it would maintain monetary policy, halting its five-time tightening streak since October 2021.

The central bank said that while inflation is still elevated, its tightening moves have “dampened the momentum of price increases.”

“The impact of the MAS monetary tightening is still affecting the economy and should continue to dampen inflation,” she added.

As such, it will maintain the prevailing rate of appreciation of the exchange rate band known as the Singapore dollar nominal effective exchange rate and there will be no change in its width or the level at which it is centered.

Singapore controls monetary policy through exchange rate adjustments and not through interest rates. On Friday, the Singapore dollar was trading at 1.3255 against the US dollar.

The MAS expects inflation to remain elevated over the coming months as cumulative business costs impact consumer prices.

Headline inflation for Singapore was 6.3% in February, while MAS core inflation – which excludes accommodation and private transport costs – is at a 14-year high of 5.5%.

However, inflation is expected to “slow down more noticeably” in the second half of this year and end the year significantly lower. The MAS forecast core inflation of around 2.5% by the end of 2023.

For the full year, MAS core inflation is expected to average 3.5% to 4.5%, with headline inflation estimated at 5.5% to 6.5%.