Singapore's economic outlook for the year remains positive despite global trade risks, the Monetary Authority of Singapore (MAS) said in its half-yearly macroeconomic review yesterday.
Economists said the review provides further support for the central bank's decision earlier this month to tighten monetary policy for the first time in six years, and highlighted additional inflationary risks.
The MAS reiterated its expectation for full-year gross domestic product (GDP) growth to come in at "slightly above the middle of the forecast range" of 1.5 per cent to 3.5 per cent.
It said that with global final demand expected to stay firm this year, trade-related sectors will anchor growth and see further expansion in the coming quarters.
Modern services will become a more important driver over time, with digital activities having emerged as an important growth engine.
Growth in these two areas will have positive spillovers for domestic-oriented services, which were a drag on growth last year but are expected to contribute "positively, albeit not substantially, this year", said the MAS.
On the global front, the escalation of rhetoric from the United States and China has stoked fears of protracted trade tensions, the MAS noted in the review.
While the direct impact from announced tariffs should be limited, a loss of confidence could curb investment and hit consumer spending, dampening global growth and posing "some downside risk" for Singapore.
"Nonetheless, barring a significant escalation of trade and other geopolitical tensions, domestic GDP growth is expected to continue on a steady expansion path for the rest of the year," it said.
The central bank was also optimistic on labour, saying: "A broad range of indicators - including reduced retrenchments and falling unemployment rates - suggests that labour market conditions are improving."
Barring a significant intensification of global trade frictions, the MAS expects overall labour demand to expand this year, supported by hiring in external-oriented and community, social and personal services.
Despite a fall in total employment for the first quarter of this year, labour market recovery was underpinned by the unemployment rate falling to 2 per cent last month, said OCBC head of treasury research and strategy Selena Ling.
She noted the MAS' "greater watchfulness about the increase in core inflation" due to this.
The MAS expects core inflation to rise gradually for the rest of the year, with the projected reduction of labour market slack adding about a 0.2 percentage point to core inflation.
Full-year core inflation and headline inflation are expected to come in at the upper half of their respective forecast ranges of 1 per cent to 2 per cent and zero to 1 per cent.
However, Maybank Kim Eng economist Chua Hak Bin worried that some wage rises may come in sectors without commensurate productivity growth, resulting in inflationary wage cost pressures.
UOB economist Francis Tan believes wage rises to be supported by demand, but instead flagged the risk of rising global commodities prices.
A highlight of yesterday's review was that it makes clear MAS' expectation for inflation to trend higher, he said, adding: "We know that if things go on as expected, they won't pull back - it won't suddenly be neutral policy again."
