SINGAPORE - Singapore’s central bank believes inflation will abate and the economy will grow, albeit at a much slower pace next year.

But the Monetary Authority of Singapore (MAS) warned that if inflation persists, some of its major trading partners may push their economies to the brink of recession to achieve price stability.

A shrinking economy implies a collapse in the aggregate demand for goods and services and a surge in unemployment, which in turn takes away the incentive to raise prices.

MAS managing director Ravi Menon said the US Federal Reserve, for instance, has been raising its interest rates at the fastest pace in decades, with no impact on inflation so far. If it continues on the path of aggressive monetary policy tightening, the United States economy could tilt into recession.

A recession in a major economy, such as the US or the European Union, would have ripple effects worldwide and will hit Singapore’s export-driven economy as well, said Mr Menon at the launch of MAS’ annual report on Tuesday (July 19). 

The best-case scenario, as outlined in the report, is that inflation will start to ease in the fourth quarter of this year and further moderate next year as supply chain constraints ease, commodity prices peak and major central banks’ interest rate hikes cool down consumer and investment demand.

Economic growth will slow but excess savings held by households and tailwinds for businesses from Covid-19 reopening will keep recession at bay, it said.

However, Mr Menon added: “The outlook is subject to considerable uncertainty."

He said inflation may remain elevated if fresh shocks to global energy and food supplies arise from the war between Russia and Ukraine - both major producers and exporters of oil and gas, and a variety of food grains and industrial metals.

Supply chain frictions may also worsen if new outbreaks of Covid-19 variants require reimposing mobility curbs to contain the spread of the virus.

To help slow the inflation momentum from imported and domestic cost pressures and ensure medium-term price stability, MAS pre-emptively shifted to a positive rate of appreciation and has tightened monetary policy four times since October last year.

Mr Menon said a key source of inflation pressure in most advanced economies, and in Singapore as well, has been labour market tightness.

With a higher demand for labour, workers are being paid more.

The wage increases have exceeded productivity gains, noted Mr Menon, and this further fuels price pressures.

Resident wages are up by an average 6.2 per cent year on year over the past three quarters, running slightly ahead of real productivity growth of 5.5 per cent.

Mr Menon said that while the seasonally adjusted resident unemployment rate has declined to 3 per cent, the lowest since end-2018, total employment is still 2.5 per cent below the pre-pandemic level.

This is mainly because Singapore’s non-resident workforce has declined by 15 per cent since December 2019.

Similar labour market tightness prevails in some of Singapore’s major trading partners, partly explaining the persistence of inflationary pressures.

But incessant inflation, seen by policymakers as a bigger evil than economic downturns, raises the risk of aggressive tightening and thus the chances of a deeper recession.

Mr Menon said that a good scenario would be a “soft landing”, where growth slows down sufficiently to reduce inflation but the economy avoids recession.

But given how high inflation has climbed and the degree of monetary policy tightening that may be necessary to bring inflation down, the pathway to achieve such a scenario is quite narrow, he noted.

“A more likely variant of a good scenario is a mild, short-lived technical recession that tames inflation and sets the stage for a sustained recovery in growth.”

Two consecutive quarters of negative economic growth is known as a technical recession.

Mr Menon made clear that as of now, neither a recession nor a stagflation in Singapore is expected for next year.

“Economic growth in Singapore is expected to moderate further in 2023 in tandem with the slowdown in our major trading partners. The extent of the growth moderation will depend in part on how the scenarios for the global economy will pan out.”

Singapore economy in 2023: The good, the bad and the ugly scenarios

Economic growth in Singapore is expected to moderate further next year, in tandem with the slowdown in its major trading partners, said the Monetary Authority of Singapore (MAS) on Tuesday (July 19).

As of now, neither a recession nor a stagflation is expected in Singapore next year. But there are considerable downside risks in the global economy which bear close watching to assess Singapore’s growth prospects. 

Here are three scenarios for the Singapore economy in 2023, according to MAS:

The Good

A good scenario would be what policymakers and analysts call a “soft landing”, where growth slows down enough to reduce inflation but the economy avoids recession.
Given how high inflation has climbed and the degree of monetary policy tightening that may be necessary to bring inflation down, the path to achieve this scenario is quite narrow.

A more likely variant of a good scenario is a mild, short-lived technical recession that tames inflation and sets the stage for a sustained recovery.

The Bad

A bad scenario is a deeper recession in some of the major economies even as inflation is brought down. That is commonly termed a “hard landing”.
Such a scenario could occur if monetary policy tightening, such as higher interest rates, triggers sharp dislocations in financial markets causing asset prices to move wildly.

The Ugly

An ugly scenario would be one where growth stagnates while inflation remains high. Such an economic condition is called “stagflation”.
This could happen if fresh supply shocks or disruptions further boost inflation while monetary policy tightening sharply reduces economic activity.
Stagflations are rare but when they occur, they present difficult policy dilemmas for governments and central banks.