Singapore's Economic Outlook Given Rising Inflation and Government's Plans to Assist Businesses and Singaporeans

Miss Cheng Li Hui asked the Minister for Trade and Industry (a) whether the Government forecasts stagflation occurring in Singapore in the next few years; and (b) if so, what are the measures considered to deal with stagflation and its impact on businesses and livelihoods in Singapore.

Mr Desmond Choo asked the Minister for Trade and Industry (a) how has inflation affected consumer demand and business sentiments; and (b) in what ways will Singapore's economic performance be affected by global and domestic inflation.

The global economic environment has become increasingly challenging. The Russia-Ukraine conflict is now entering its fifth month, while economies such as China continue to grapple with the COVID-19 pandemic. Protracted global supply disruptions, due in large part to the conflict and the pandemic, have fuelled inflationary pressures globally, especially through their impact on energy and food commodity prices.

As a small, open economy, Singapore cannot be insulated from these external developments. In particular, we have seen a significant rise in inflation. MAS Core Inflation picked up to 3.6% year-on-year in May, from 3.3% in April and 2.5% in the first quarter of the year. CPI-All Items inflation, which includes private transport and accommodation costs, rose to 5.6% year-on-year in May, from 5.4% in April and 4.6% in the first quarter.

Inflation is likely to pick up further in the coming months but should start to moderate towards the end of the year if external inflationary pressures recede. For the year as a whole, MAS Core Inflation is expected to average 2.5% to 3.5%, while CPI-All Items inflation is projected to average 4.5% to 5.5%.

Mr Desmond Choo asked whether inflation has affected consumer demand and businesses in Singapore. Notwithstanding rising inflation, economic activity in Singapore has remained resilient thus far. In the first quarter of 2022, Singapore’s GDP grew by 3.7% on a year-on-year basis. Non-oil domestic exports and industrial production remained healthy in April and May, rising by 9.3% and 10% year-on-year respectively over this period. Similarly, retail and food and beverage sales volumes increased by 8.4% and 6.9% year-on-year respectively in April, reflecting a continued recovery from the pandemic.

For the rest of the year, the recovery in international travel and domestic demand with the lifting of COVID-19 restrictions will help to mitigate some of the weaker external demand.

Miss Cheng Li Hui and Mr Shawn Huang asked whether Singapore is likely to see a recession or stagflation within the year or the next few years. Overall, MTI expects the Singapore economy to expand by 3% to 5% in 2022, with growth likely to come in at the lower half of the forecast range. We expect growth to moderate further next year. At this stage, we do not see or expect a recession or stagflation in 2023. Nonetheless, risks in the global economy remain significant. These include further escalations in the Russia-Ukraine conflict, more severe global supply-side disruptions, risks to financial market stability if monetary policy tightening in advanced economies is faster than expected, and the trajectory of the COVID-19 pandemic.

Mr Desmond Choo also asked how rising global interest rates will affect lending and mortgage rates in Singapore. To tame rising inflation, the central banks of many economies have started to raise interest rates. With higher global interest rates, Singapore’s domestic interbank interest rates have also risen in tandem, although the extent of the increase has been moderated by the strengthening of the Singapore dollar. The increase in domestic interbank interest rates has in turn led to a rise in lending and mortgage rates in Singapore. As global interest rates could increase further, businesses and households should bear in mind the rising cost of borrowing when making borrowing decisions.

The Government understands businesses and Singaporeans’ concerns. The Government plans to address the challenging environment in three ways. First, we will maintain a stable macroeconomic environment so that businesses can make investment and operational decisions with confidence. The Monetary Authority of Singapore has tightened monetary policy three times since October last year. The appreciation of the Singapore dollar will help to temper imported inflation. Second, the $1.5 billion support package announced on 21 June will provide immediate and targeted relief to lower income and vulnerable Singaporeans, who are disproportionately affected by higher prices. The Deputy Prime Minister and Minister for Finance will be elaborating on the support measures later. Finally, MTI will continue to attract investments and foster new growth engines. Strong job creation and wage growth are the best ways to combat inflation.

To sum up, our economy is facing significant headwinds, including a global economic slowdown and strong external inflationary pressures. However, I am confident that by working closely with businesses and Singaporeans, we will be able to weather the storm, as we did with the COVID-19 pandemic.

Thank you, Mr Deputy Speaker. My question to Minister of State is, since the decisive move towards living with COVID-19 earlier this year, we have actually seen a hive of economic activities picking up, possibly due to the pent-up demand the catch-up growth but also the new investment activity, perhaps due to our hub status and so on.

I have been hearing businesses lamenting about the shortage of labour, the intense poaching of manpower, the turnovers are very high, we are seeing that traffic is getting jammed up with more commercial vehicles on the roads, ERP has made a comeback, the construction sector is also back to full swing. My question to the Minister of State may be quite contrarian to the question being filed by my colleagues in the House.

Firstly, is our economy on over-drive mode at the moment, notwithstanding the backdrop of rising global interest rates at this point in time? Secondly, is this sustainable and is this healthy growth for us? Do we need to better curate this growth so as to avoid this intensed poaching or pricing up of resources, and also the undesirable effect of crowding?

Sir, I thank the Member for his questions. First, I would say that our economy is operating slightly above potential. I think in the last two years of the COVID-19 pandemic, we have been urging for and doing all our best to help our businesses recover. I would also say that we should grow if we can grow because strong growth will enable us to create jobs, good wages, make our economy more vibrant, attractive to foreign investment; it also helps us in many ways to address some of the inflationary pressures that I mentioned earlier on.

But, granted, we also have to manage inflation, upskill our workers, prepare our businesses for the long run.

To the specific points that the Member raised, if you take into account this expected recovery and the resilient performance of some of the outward-oriented sectors, such as our electronics cluster, MTI's assessment is that GDP growth is on track to come in within the official forecast range mentioned earlier of between 3% and 5%, notwithstanding external shocks or growing headwinds in the economy.

This growth forecast actually represents above-trend growth because in the five years prior to the pandemic, GDP growth averaged about 3.2% per annum. This growth forecast, as I had mentioned, represents above-trend growth but along with it, also the economy's output gap, which is actual output minus potential output, and it is estimated to turn mildly positive this year.

He talked a bit about labour market conditions. We all know that labour market conditions are tight. We expect them to remain tight but a significant overheating of the labour market is unlikely. Following the significant easing of border measures since end-March, the in-flow of non-resident workers should help to alleviate manpower shortages and also moderate labour cost pressures in the coming months.

If we were to assume stabilisation in global commodity prices and the unwinding of global supply chain constraints, both MTI and MAS expect inflation to moderate towards the end of the year, as I had mentioned earlier on, even as it remains higher than the historical average.

Thank you, Deputy Speaker. And thank you to the Minister of State. I have a clarification question. In his speech, the Minister of State mentioned that he expects the rate of inflation to moderate by the end of the year, the headline inflation to go from 4.5% to 5.5%, to something on the lower end of that range. I wonder whether he would be willing to share either MTI or MAS' forecast for what it would be not just this year but into 2023. And related to that, whether there will be plans for addressing cost of living challenges beyond the $1.5 billion package announced a few weeks ago, were inflation to exceed what would be expected.

I ask this in part because MAS has itself suggested that as much as a third of inflation is actually domestic in origin and no longer just international.

I thank the Member for this supplementary question. Inflationary pressures, as we all know, are subject to external environment. Currently, the external cost pressures – I mentioned the Russia-Ukraine conflict as well as supply chain global disruptions – will impact projections. But at this point, MAS and MTI expect inflation to moderate towards the end of the year, baring any significant shocks.

With regard to the support for businesses as well as households in addition to the $1.5 billion package that we announced, we have also previously announced over the course of the COVID-19 pandemic support for businesses, support for households, and in the medium to longer term, to help businesses and workers to upskill, to help businesses to prepare for the global economy – the changes, the swifts to supply chain, the shifts towards the digital economy, as well as the shifts towards the sustainable economy.

Deputy Prime Minister and Minister for Finance Mr Lawrence Wong will go into some of these details later in his reply to the Parliamentary Questions, talking about the many different physical measures that we have out in place to support businesses, as well as Singaporeans.

Thank you, Mr Deputy Speaker. I have two supplementary questions. One, as inflation has stayed elevated for some time, we must expect consumers to make adjustments to consumption patterns, can we ask Minister of State Alvin Tan: has inflation caused demand destruction in certain categories of consumption? And as the consumer expected short- to medium-term inflation continues to stay elevated, there is a potential adverse impact on business and investment activities. Does the Ministry believe that our GDP growth might, therefore, be affected going ahead?

I thank the hon Member for his supplementary questions. Higher prices will lead to some adjustments in consumer behaviour, as consumers substitute between products, as well as services. Thus far, the higher inflation readings in recent months have not led to any significant cut-backs, at least in household consumption.

The latest private consumption, retail sales and F&B sales indices point to firm consumption spending. In fact, spending on food services, as well as wearing apparel and foot ware have seen a discernible step-up, relative to Q12022, in the month of April, following the removal of mobility restrictions.

I also wanted to highlight an example. A consumer-facing company in Singapore that has done well so far this year after restrictions have been removed is Dian Xiao Er. They shared that the dining crowd has returned and sales have recovered to pre-COVID-19 levels. Dian Xiao Er is expecting its revenue to increase by 40% from FY2021 to FY2023, based on this recent performances.

On the Member's second supplementary question, I would say that, in the near term at least, external inflationary pressures are expected to remain strong, as factors driving up global inflation, such as elevated energy prices, are likely to persist for some time. Domestically, I mentioned earlier that the labour market is still tight. It will remain tight in the near term and will lead up to continued upward pressures on labour costs. But with the relaxation of the border measures in March and inflows of non-resident workers, I think, that should also help alleviate some of these pressures.

Deputy Prime Minister and Minister for Finance will also share, as I mentioned earlier, some of the different fiscal measures that have been put in place to support businesses and households during this time.