SINGAPORE - While war and global inflationary pressures are responsible for the current increase in prices here, carbon and labour are set to be permanent constraints for Singapore's economy, Finance Minister Lawrence Wong said on Monday (April 4).

Even if the war in Ukraine had never happened, Singapore would still need to adjust to a secular increase in energy prices as it decarbonises its economy, he said. The country's rapidly ageing population also means it will continue to face a tight labour market in the future.

This means that Singapore cannot offset labour and carbon costs perpetually and must double down on its transformation efforts to make its economy more resilient to external shocks, Mr Wong added.

During his ministerial statement in Parliament, Mr Wong provided the House with an update on the macroeconomic situation amid the conflict in Ukraine and the Government's approach on issues such as inflation and support for households.

He highlighted several factors that contributed to rising global prices in 2021, such as expansionary macroeconomic policies adopted by major economies such as the United States and the euro zone to stimulate economies amid the Covid-19 pandemic, supply chain pressures and demand for energy outstripping supply.

With the war in Ukraine, it is now likely that global inflation will be higher for longer, the minister acknowledged.

Inflation in Germany and the US has already risen to nearly 8 per cent, the highest in 40 years, and no one can tell how the war in Ukraine will unfold, Mr Wong said.

"We all hope that attempts to de-escalate are successful, and a diplomatic solution can be found at the negotiating table.

"But we must be prepared for a prolonged conflict, or even further escalation, which will cause further supply disruptions and additional inflationary pressures," he cautioned.

Aside from the war, other factors are also contributing to rising prices, Mr Wong said, pointing out how the global economy is continuing to grapple with supply chain issues due to the pandemic.

In the longer-term, global warming and increased adverse weather events could affect agricultural productivity and reduce food production, putting upward pressure on prices, and the global economy will also have to internalise the cost of carbon in its overall consumption over time, he added.

Mr Wong noted how central banks of several major economies, such as the US Federal Reserve and the Bank of England, have raised interest rates to tackle inflation, with the European Central Bank expected to follow suit.

But these central banks also face a difficult dilemma in needing to balance between economic growth and reining in prices, he said.

If downside risks of higher inflation and slower growth for the global economy materialise, there will be a major impact on Singapore as a small and open economy, the minister said.

To this end, Singapore has anticipated some of these risks and taken prompt action through monetary and fiscal policies.

For one thing, the Monetary Authority of Singapore (MAS) had pre-emptively raised the rate of appreciation of its exchange rate policy band in October last year and also in an off-cycle move in January this year, to help dampen inflationary pressures, Mr Wong pointed out.

"Monetary policy will continue to do its part to ensure medium-term price stability," he said, adding that the MAS is watching closely the impact of geopolitical- and pandemic-related shocks on the Singapore economy and inflation, and will be putting out its monetary policy statement later this month as scheduled.

Mr Wong underscored the importance of economic restructuring and transformation to make Singapore's economy more resilient to external shocks.

"This is also how we sustain continued income growth for Singaporeans, with earnings rising faster than inflation, so that we can retain and grow our purchasing power, and achieve higher standards of living," he said.

Citing how the pandemic had accelerated the pace of digitalisation among businesses here, the minister said he hopes the current increase in business costs and energy prices will motivate all firms to change their mindsets and practices, and to tap available government schemes to transform.

To help businesses deal with current challenges, the disbursement of the Small Business Recovery Grant, which provides one-off cash support of up to $10,000 for small and medium-sized enterprises most affected by Covid-19 restrictions over the past year, will be brought forward, Mr Wong said.

Most eligible businesses will be able to receive the grant by June, he noted. It was earlier announced at Budget 2022 that eligible firms would be notified from June.

In his speech, the minister also noted how this is not the first time Singapore has had to deal with such challenging external economic conditions. For example, the Republic's inflation rate was as high as 30 per cent year on year in the first half of 1974 and around 10 per cent in the second quarter of 1980 during the oil crises of the 1970s.

"These events underscored our vulnerabilities to inflation, as a price-taking small open economy. In response, in the early 1980s, we developed a unique exchange rate-centred monetary policy that helped tame imported inflation," Mr Wong said.

Similarly, the Government's swift action also helped Singapore navigate the 2008-2009 global financial crisis, and measures taken amid the Covid-19 pandemic have enabled resident employment and income to quickly recover to pre-pandemic levels while keeping the death toll low.

But Singapore now faces yet another economic challenge, before it has had the chance to see through the pandemic, said the minister.

"After many years of relative price stability, the recent surge of higher inflation has understandably come as a shock to many. But when viewed against the global context and our own experience, I hope we can better understand the causes of higher prices and what we can do to manage this together."

Singapore must not let the current situation become a "blame game", with the Government against people, sellers against buyers, or hawkers against consumers, he stressed.

"What we are experiencing today in Singapore is the result of external forces that impact the entire global economy. We can't do very much to change this, but we can continue to keep faith with one another as we have done over the last two years."