Balancing growth and inflation
- Advance GDP estimates for 1Q22 moderated to 3.4% YoY (0.4% QoQ sa)
- MAS has tightened its exchange rate policy significantly to anchor inflation
- Implications for our forecast – we have maintained our growth forecast for 2022 at 3.5% but raised our inflation forecast to 4.6%
- Implications for investors –USD/SGD is expected to peak at 1.39 in 3Q22
Advance GDP estimates for the first quarter suggest that economic growth may have moderated to 3.4% (DBSf: 3.6%), down from 6.1% in the previous quarter. On the margin, growth momentum has eased to 0.4% QoQ sa, from 2.3% previously. Notably, though there has been a broad-based slowdown in growth on a YoY basis, which is consistent with our long-held-belief, growth momentum (QoQ sa) in the key manufacturing sector has dipped into the red (-1.2%), the first decline after four consecutive quarters of expansion. Though this is likely part and parcel of the normalisation process, there are risks in the horizon worth watching.
China is also a critical factor to watch on the growth front, amid spikes in domestic infections, the resulting lockdowns in key cities amid its zero Covid policy. This will have profound implications on the prospects of Singapore’s manufacturing sector, which thus far has been the main engine of the recovery.
Inflation is another key risk in 2022 amid rising global price pressure. A strong global recovery, supply-side bottlenecks and more recently, the Ukraine-Russia war has driven global energy, food and commodity prices significantly higher. We now expect headline inflation to average 4.6% in 2022, up from our previous forecast of 3.8%. The price barometer will likely hover around the 5% level in the coming months before tapering off on a high base effect towards the end of the year.
In response to the inflation risk, the Monetary Authority of Singapore increased the appreciation pace and re-centred higher the SGD NEER policy band. There was no change to the width of the band. Effectively, the re-centring took back the downward shift implemented during the Covid outbreak in March 2020. Throw in the three steepening since last October, the MAS is ahead of other central banks hastening the return of monetary policy to neutral and tampering inflation expectations.