The Singapore economy bounced back strongly from the pandemic. GDP growth for 2021 registered 7.6%, up from a revised -4.1% in the previous year. A high vaccination rate will put the economy firmly on the reopening path in 2022. Furthermore, As Singapore continues its effort to inoculate the remaining population and press forward with the reopening of the economy, particularly revitalising the struggling travel-related sector, contributions to GDP growth from the various sectors will become less lop-sided, and the recovery will become more even. We expect full-year GDP growth to ease to 3.5% in 2022, in line with the official forecast range of 3.0 – 5.0%.
However, inflation will be a key risk. Inflation has continued to surprise on the upside, with December print at 4% YoY, the highest reading since Feb13. Core inflation has also risen to 2.1%, highest since 2014. Externally, energy and commodity prices (e.g., metal), as well as some agricultural product prices are rising, leading to costlier wholesale prices and higher production and construction costs. Asset inflation is also building up. The confluence of domestic and external inflationary pressure has significantly altered the trajectory of inflation.
We expect headline inflation to average 3.8% in 2022. higher than the new official forecast range of 2.5%-3.5%. Core inflation is also projected to be higher at 3.0%, up from 0.9% in 2021. And to add to the concern, there is risk that the upcoming GST hike may take effect as early as July this year. Expect another spike in inflation should the GST be introduced. Considering the above, there is urgency for policymakers to anchor inflation expectation and to buffer imported inflation.
The Monetary Authority of Singapore “slightly” increased the slope of the SGD NEER policy band in an inter-meeting on 25 January. The policy band was last returned to a gradual and modest appreciation path at the scheduled meeting in October 2021. We estimate the band to rise at a slightly increased pace of 2% a year with the policy move. Amid the inflationary pressure, another tightening at the scheduled policy meeting in April is possible, which in turn have a “cooling” effect on growth.