Macro snapshot: Story of war and omicron
? The crisis in Ukraine driving up oil prices poses upside risk to inflation in Singapore by not allowing the PPI to continue its nascent deceleration.
? Issues regarding Ukraine’s neon gas and Russia’s palladium could weigh on the growth of Singaporean electronics manufacturing in the near-term.
? Despite ICU cases remaining under control, rising cases requiring oxygen supplementation numbers are halting the city state’s easing of measures.
Oil hitting US$100/bbl could lead to inflation persisting longer
Singapore’s headline inflation has accelerated for the seventh month in a row , albeit marginally, keeping a 4.0% yoy reading in Jan 22 as it had in Dec 21. Although most Singaporeans can be shielded from COE premiums, rising oil prices also force their way into core inflation via direct methods such as utility bills (electricity +18.7% yoy in Jan 22; gas +9.6% yoy in Jan 22), or indirect methods with rising production costs for firms (Singapore Domestic Supply Price Index, DSPI, +22.0% yoy in Dec 21). The base effect argument of oil stopped holding around mid-2021 w hen prices surged beyond pre-pandemic levels. We expect the ongoing surge in COE premiums to cool off some time in 2H22. We expect accommodation (+3.1% yoy in Jan 22) to remain elevated throughout the year as worker shortages persist and demand for apartments remains hot despite cooling measures (purchase of new private apartments climbed to 673 units in Jan 22 from 650 units in Dec 21). Despite the DSPI falling to 22.0% yoy in Dec 21 follow ing its multi-decade high of 26.1% yoy, the price of WTI Crude Oil rising to US$100 during the week as a result of the crisis in Ukraine is unlikely to support further deceleration in the near-term. We expect headline inflation to average at 3.0% in 2022F, with the majority of it being front-loaded, and core inflation to average at 2.4%.
Crisis in Ukraine likely to affect the global chip supply chain
Manufacturing activity in Singapore decelerated sharply from a 16.0% yoy increase in Dec 21 to a 2.0% yoy increase in Jan 22. Despite electronics manufacturing recovering from a 2.6% yoy contraction in Dec 21 to eke a 0.1% yoy growth in Jan 22, the drastic turn taken by biomedical manufacturing to contract by 10.6% yoy vs. a 90.5% yoy growth in Jan 22 weighed heavily on the city state’s Jan manufacturing. Despite a weak start to manufacturing to begin the year, w e expect it to pick up in the months ahead, but exhibit a growth lower than what was seen in 2021. How ever, given the recent invasion of Russia into Ukraine, we would like to highlight a downside risk to this assumption. Although we assume the ongoing chip crunch is likely to last until 2023F supporting Singaporean manufacturing and NODX, a supply-chain issue could disrupt momentum. Ukraine is a major producer of neon gas critical for lasers used in chipmaking (neon gas prices shot up 600% during the Crimea Crisis) and Russia supplies c.33% of global palladium demand. We expect to see some volatility in the periods ahead as the IPI fell 10.7% mom seasonally – adjusted (SA) in Jan 22 vs. 3.0% mom SA expansion in Dec 21.
Rising oxygen supplementation cases halts measure easing
On 16 Feb 2022, the Singaporean government announced a set of streamlined Safe Management Measures aimed at simplifying Covid-19 rules beginning 25 Feb and 4 Mar (see Fig 8). However, the government announced yesterday that it will delay the planned easing of measures until further notice. The number of individuals requiring oxygen supplementation yesterday was 221, eerily close to the 308 peak seen during the Delta wave last year, although the low ICU cases provide some saving grace to the situation (see Fig 1). Singaporean retail sales accelerated to 6.7% yoy in Dec 21 following a growth of
2.2% yoy in Nov 21. With a growth of 11.1% for the entire 2021 follow ing a contraction of 15.3% in 2020, we believe that retail sales are on track to surpass pre-pandemic levels by end-2022. We also reiterate our expectation that categories dependent on a return to normalcy, e.g. department stores, F&B, eyewear and makeup, are unlikely to recover by the end of 2022.