The economy should continue to expand this year although protectionism risks have risen, said Monetary Authority of Singapore (MAS) managing director Ravi Menon yesterday.
He noted at a briefing that gross domestic product (GDP) is expected to expand at 2.5 to 3.5 per cent, unchanged from an official forecast in May. "While the central prognosis for the Singapore economy this year remains intact, spillovers from global trade conflicts bear close watching."
These spillovers arise from Singapore's key position in the regional electronics production value chain, as well as a hub for air and sea transport and financial services.
Bilateral trade between the United States and China indirectly contributes to about 1.1 per cent of Singapore's GDP.
Flows between the US and European Union add another 0.5 per cent, while Nafta (North American Free Trade Agreement) trade between the US and Canada and Mexico contributes 0.6 per cent, added Mr Menon, who was speaking at the MAS annual report briefing.
But "tail risks" to global growth have grown significantly over the last six months.
"Earlier this year, I described the 'Goldilocks' state of the global economy - healthy growth, low inflation and easy financial conditions," he said.
"I had then also warned that the 'three bears' - inflation, protectionism and financial instability - could make an appearance at any time to spoil the party.
"Six months later, we can say that at least two of the three bears have been sighted - inflation and protectionism."
The risk of more rapid inflation has heightened, said Mr Menon. It is on an upward path globally, and in the US has reached the Federal Reserve's 2 per cent target amid a tightening labour market.
Accordingly, last month, the Fed indicated a faster pace of interest rate increases.
"The expectation now is for two more rate hikes this year. But if inflation surprises on the upside, the Fed could be compelled to hike more," said Mr Menon.
"This would tighten global financial conditions by more than currently anticipated."
Mr Menon noted, however, that Asian economies are in a relatively stronger position to absorb these financial shocks.
He also addressed the global economy's hottest issue: "Protectionism is rearing its ugly head. The immediate effect... is limited and does not threaten global growth - yet.
"The real risks from the tariffs are spillover effects, escalation and economic uncertainty.
"If this escalates into a trade war, all three engines of global growth - manufacturing, trade and investment - will stall."
The global economy is still in good shape but the momentum has started to flag and tail risks have grown, said Mr Menon.
"So while global growth should be good this year, it may not be quite as good as last year."
The MAS recorded a net profit before contribution to the Consolidated Fund of $6.4 billion for the financial year ended March 31.