Ukraine war could keep driving up prices in S'pore

The war in Ukraine may have somewhat dented the growth outlook in trade-reliant Singapore, but the domestic economy is expected to pick up some of the slack with the easing of Covid-19 curbs.

The war, however, could hit Singapore on the prices front. As it disrupts the supplies of commodities such as food grains, oil and gas, and industrial metals, it could add to the inflationary pressures the Republic is already facing.

That is why, while Singapore's growth prospects for the year remain healthy, the central bank feels that prices could rise more than it anticipated earlier.

The Monetary Authority of Singapore (MAS) has stuck with its forecast for the Singapore economy to grow by between 3 per cent and 5 per cent this year, barring further disruptions caused by the war or a severe worsening of the pandemic.

"The projected growth outcome represents a moderation from the 7.6 per cent expansion in 2021, but would still be above trend for the second consecutive year," MAS said in its biannual macroeconomic review report yesterday.

Inflation, however, is the bigger worry. The surge in commodity prices will raise domestic inflation for electricity and gas, fuel and non-cooked food, such as fresh meat, fruit and vegetables, over the year, and in turn feed into higher transportation and food services costs.

In fact, MAS warned that prices of non-cooked food could remain high, even beyond this year.

Core inflation, which excludes accommodation and private transport costs, will also pick up sharply in the coming months, but moderate in late 2022, MAS said.

OCBC Bank's chief economist Selena Ling said the central bank sounds fairly confident on the growth front, but the greatest uncertainty pertains to whether price pressures will ease towards the end of the year. "So, the risk is for inflationary pressures to be more persistent than expected," she said.

Inflation in Singapore spiked to a 10-year high in March, resulting in an aggressive tightening of monetary policy by MAS on April 14 to cap the surge in prices.

At the same time, it revised its inflation forecasts. Core inflation is likely to come in at 2.5 per cent to 3.5 per cent, up from the 2 per cent to 3 per cent expected in January. Overall inflation is forecast at 4.5 per cent to 5.5 per cent, from the earlier range of 2.5 per cent to 3.5 per cent.

Underscoring how damaging inflation can be, MAS said in its report yesterday that the price shocks are eroding real incomes and could depress demand for goods and services, and investment flows.

"Supply shocks arising from the Russia-Ukraine conflict have introduced renewed uncertainties surrounding the outlook for the rest of the year, at a time when global supply chain frictions arising from the pandemic have yet to be fully resolved."

Businesses, too, are worried about the impact of the war, and the Business Optimism Index compiled by the Singapore Commercial Credit Bureau dipped slightly in the second quarter of this year to 5.35 percentage points, from 5.91 in the previous quarter.

On a brighter note, however, Singapore's resolve to live with Covid-19 is likely to keep the economy on track to achieve its growth forecast for the year.

Domestic safe management measures were eased and border restrictions relaxed towards the end of last month, improving the prospects of travel reviving and retail sales rising.

"Reduced restrictions will bring forward the projected recovery in the domestic-oriented and travel-related sectors to the second quarter, earlier than the previous expectation of the second half of this year," MAS said.

"Accordingly, sectors which bore the brunt of the pandemic are projected to stage a more decisive recovery and contribute more significantly to gross domestic product growth in 2022, compared with last year," MAS said.

The central bank also expects hiring to remain firm, wage growth to pick up and unemployment to remain low this year.