Singapore’s central bank sees weak growth, lower inflation in 2023

Singapore’s central bank said the country’s gross domestic product is expected to “moderate significantly” this year and that the outlook for growth this year has “subdued”.

This comes as the economy grew 0.1% in the first quarter compared with a year ago, according to the Trade and Industry Ministry’s advance GDP estimate. However, compared to the previous quarter, GDP fell by 0.7%, the first decline since the second quarter of 2022.

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

However, it expects that tighter financial conditions globally will lead to an increased strain on global investment and production. MAS also sees the increase in reopening demand in most regional economies slowing over the course of the year.

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

MAS said “growth in Singapore’s main trading partners will slow in 2023, below the pace recorded in the previous two years.”

Singapore’s trade-related cluster is expected to contract further, and domestic growth is forecast to slow as higher consumer prices and interest rates curb consumption. MAS expects GDP growth in 2023 to be between 0.5% and 2.5%, down from growth of 3.6% in 2022.

Singapore’s manufacturing sector accounts for the largest share of GDP, accounting for 21.6% of nominal GDP in 2022. The sector contracted 6% in the first quarter from a year ago, according to the Ministry of Trade and Industry’s release, steeper than 2.6% year-on-year contraction recorded in the previous quarter.

On a quarter-on-quarter basis, the sector shrank by 5.2% in the first quarter, a reversal from the 1% expansion in the fourth quarter of 2022. The ministry noted that there was a decline in output across all manufacturing clusters, except transport engineering.

On Friday, the MAS also announced that it will maintain its monetary policy, ending its five-straight tightening streak since October 2021.

The central bank explained that while inflation remains high, its austerity measures have “tempered the pace of price increases.”

“The effects of MAS’s monetary policy tightening are still working through the economy and should dampen inflation further,” it added.

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

Singapore manages monetary policy through exchange rate settings and not interest rates. On Friday, the Singapore dollar traded at 1.3255 against the US dollar.

MAS expects inflation to remain high over the next few months, due to accumulated business costs feeding into consumer prices.

Headline inflation for Singapore was 6.3% in February, while core MAS inflation – which excludes the cost of accommodation and private transport – has remained at 5.5% for 14 years.

However, inflation is expected to “slow down more noticeably” in the second half of this year and end the year significantly lower. MAS estimates that core inflation will reach 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 to be between 5.5% and 6.5%.