S’pore economy loses growth momentum in Q2; MAS makes another move to fight inflation

The pace of growth was slower than the 5.4 per cent economists had expected in a Bloomberg poll. ST PHOTO: KELVIN CHNG

SINGAPORE - The Singapore economy grew slower than expected in the second quarter this year, indicating weakening global and domestic demand for goods and services amid surging inflation.

Meanwhile, the Monetary Authority of Singapore (MAS) further tightened its policy stance, making room for a stronger Singapore dollar to douse the impact of rising global prices as it raised inflation forecasts for this year. 

Analysts said disappointing growth data and MAS’ surprise move show policy emphasis may have shifted to fight surging inflation rather than boost growth.

That follows a bout of bad news for export-driven Singapore from the world’s largest economy. A surprise jump in United States inflation has boosted bets on bigger and more growth-restricting interest rate hikes by the Federal Reserve.

Dr Chua Hak Bin, head of Maybank’s economic research, said: “Concerns of an inflation overshoot are outweighing that of a growth slowdown.”

Singapore’s gross domestic product (GDP) grew 4.8 per cent year on year in the second quarter, led by the manufacturing sector, said the Ministry of Trade and Industry (MTI) in flash estimates on Thursday (July 14).

While the pace of growth was faster than the upwardly revised 4 per cent in the first quarter, it was weaker than the 5.4 per cent economists had expected in a Bloomberg poll.

Compared with the first quarter and on a seasonally adjusted basis, the economy posted zero growth in the second quarter, suggesting a significant loss of momentum.

MAS also cautioned that Singapore’s GDP growth may moderate further in 2023, in tandem with a weaker global economic environment.

Dr Chua said global growth will likely slow significantly as major trading partners tighten monetary policy aggressively in response to elevated inflation, which will dampen consumer and investment spending. 

OCBC chief economist Selena Ling said Singapore's flatlining quarter-on-quarter growth marks the slowest three-month period since the first quarter of 2020, which was the start of the Covid-19 pandemic. 

“Looking ahead, growth momentum may moderate further, given recession and hard landing fears for the US, euro zone and China that are clearly weighing on business and consumer confidence at this juncture,” she said.

MTI in April had maintained its 3 per cent to 5 per cent economic growth forecast for 2022, but warned that the pace of expansion will likely come in at the lower half of the forecast range because of the impact of the war in Ukraine and China’s strict Covid-19 lockdowns.

The supply chain disruptions because of the war and the lockdowns have boosted inflation worldwide.

US inflation hit a four-decade high last month, above market expectations, boosting bets of a 100-basis point interest rate hike by the Federal Reserve later this month.

MAS said it will recentre the midpoint of the trade-weighted Singapore dollar policy band up to its prevailing level that has risen in recent weeks. There will be no change to the slope and width of the band, the central bank said in a statement.

MAS said core inflation is now projected to be between 3 per cent and 4 per cent this year, up from the earlier forecast of 2.5 to 3.5 per cent. 

As car and accommodation cost increases are also likely to remain firm, headline inflation is expected to come in at 5 per cent to 6 per cent, higher than the earlier forecast range of 4.5 per cent to 5.5 per cent, it added.

MAS said that in the near term, core inflation is expected to rise above 4 per cent. “Although it should ease in the fourth quarter of 2022, there is considerable uncertainty over the extent of the decline,” it added.

This is the fourth tightening move by MAS since October 2021, and the second time since January that the central bank has moved ahead of a scheduled meeting. The next policy statement is due in October.

MAS has been on a path of gradual monetary policy tightening in view of the rise in underlying inflation and steady economic recovery. Prices of goods and services have surged amid supply disruptions due to the war in Ukraine and China's Covid-19 lockdowns.

Ms Ling said MAS’ second off-cycle move this year illustrates the heightened challenges global central banks are facing. The big caveat is whether inflation will peak towards the year end or there would be fresh shocks.

“Price adjustments tend to be downward sticky. So even if demand cools with aggressive monetary policy tightening, the cost pass through may persist,” she said.

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MTI said the manufacturing sector expanded by 8 per cent year on year in the second quarter, similar to the 7.9 per cent growth in the previous quarter.

The construction sector grew by 3.8 per cent year on year, faster than the 1.8 per cent growth in the previous quarter.

Among the service sectors, the wholesale and retail trade, and transportation and
storage sectors collectively grew by 2.8 per cent year on year, less than the 3.4 per cent growth in the previous quarter. 

However, on a quarter-on-quarter seasonally adjusted basis, growth in manufacturing, construction and services moderated.

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The manufacturing sector expanded by 0.3 per cent in the second quarter, easing from the 0.5 per cent growth in the preceding quarter. Construction expanded by 1.9 per cent, down from the 2.9 per cent growth in the first quarter. Services expanded by 0.2 per cent, less than the 1.8 per cent growth in the first quarter.

The information and communications, finance and insurance, and professional services sectors expanded by 4.1 per cent year on year, moderating from the 5.7 per cent growth in the prior quarter.

The accommodation and food services, real estate, administrative and support services, and other services sectors grew 8.2 per cent year on year, accelerating from the 3.5 per cent growth in the previous quarter. 

Their expansion was supported by the easing of domestic and border restrictions. For example, growth in the food services sector was bolstered by the removal of dine-in group size limits in end-April. The value-added of this group of sectors, though, remained 2.7 per cent below its pre-pandemic level in the second quarter of 2019. 

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