Singapore: Balancing growth and inflation

Growth has slowed and inflation remains they key risk.
Irvin Seah, Philip Wee14 Apr 2022
  • Advance GDP estimates for 1Q22 moderated to 3.4% YoY (0.4% QoQ sa)
  • MAS has tightened its exchange rate policy significantly to anchor inflation
  • Implications for our forecast – we have raised our inflation forecast to 4.6%
  • Implications for investors –USD/SGD is expected to peak at 1.39 in 3Q22
Photo credit:Unsplash

Slower growth, high inflation

Advance GDP estimates for the first quarter suggest that economic growth may have moderated to 3.4% (DBSf: 3.6%), down from 6.1% in the previous quarter. On the margin, growth momentum has eased to 0.4% QoQ sa, from 2.3% previously. Notably, though there has been a broad-based slowdown in growth on a YoY basis, which is consistent with our long-held-belief, growth momentum (QoQ sa) in the key manufacturing sector has dipped into the red (-1.2%), the first decline after four consecutive quarters of expansion. Though this is likely part and parcel of the normalisation process, there are risks in the horizon worth watching.

China is also a critical factor to watch on the growth front, amid spikes in domestic infections, the resulting lockdowns in key cities amid its zero Covid policy. This will have profound implications on the prospects of Singapore’s manufacturing sector, which thus far has been the main engine of the recovery. In the immediate term, risks from the Russia-Ukraine war continue to linger but the direct impact on growth in this regard remains limited. Tourism and the retail sectors will benefit from the further easing of measures and reopening of borders, but this may not be enough to pick up the slack from the manufacturing sector. Overall growth performance will still be weighed down by the weaker global economic conditions. 

Inflation is another key risk in 2022 amid rising global price pressure. A strong global recovery, supply-side bottlenecks and more recently, the Ukraine-Russia war has driven global energy, food and commodity prices significantly higher. Such elevated imported inflation will spill over into Singapore’s domestic price dynamics. Juxtaposed with an already tight labour market and an increasingly positive output gap, domestic inflationary pressure will remain high throughout 2022.

We now expect headline inflation to average 4.6% in 2022, up from our previous forecast of 3.8%. The price barometer will likely hover around the 5% level in the coming months before tapering off on a high base effect towards the end of the year. Core inflation is also projected to be higher at 3.3% amid increasingly positive output gap and tight labour market. And to add to the concern, the upcoming GST hike in Jan23 will continue to keep inflation elevated heading into 2023.

A combination of high inflation, slowdown in China and tighter monetary policy will weigh down on growth prospects. While mindful of the downside risk to growth, we are maintaining our current below-consensus GDP growth forecast of 3.5% for 2022.

Tighter monetary policy to tame inflation

At today’s policy review, the Monetary Authority of Singapore increased the appreciation pace and re-centred higher the SGD NEER policy band. There was no change to the width of the band. Effectively, the re-centring took back the downward shift implemented during the Covid outbreak in March 2020. Throw in the three steepening since last October, the MAS is ahead of other central banks hastening the return of monetary policy to neutral and tampering inflation expectations. Unlike other Western countries, the upward revision in this year’s core inflation forecast was modest, i.e., from 2.0-3.0% to 2.5-3.5%.

USD/SGD hit a low of 1.3556 at the announcement from yesterday’s close of 1.3624. According to our model, the re-centring the band could lower the floor for the implied policy band for USD/SGD to 1.3500 to 1.3550 today, barring no upside surprises in the USD against its basket of currencies. While the tighter SGD policy has kept USD/SGD stable against a rising DXY, we remain vigilant of incoming aggressive Fed tightening lifting the USD against Emerging Asian currencies this quarter. We maintain our forecast for USD/SGD to peak at 1.39 in 3Q22.

To read the full report, click here to Download the PDF.

Irvin Seah

Senior Economist - Singapore

Philip Wee

Senior FX Strategist - G3 & Asia

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.