Final MAS Tightening in Sight as Growth Slows, Economy to Skirt Recession
MAS Preview: Tightening via Re-Centering of S$NEER Band
We expect the MAS to tighten by re-centering the S$NEER band to the prevailing level at the mid-April meeting to dampen core inflation, which remains well above the MAS’ comfort zone. We do not expect a change to the slope and width of the band. This will be the sixth consecutive tightening move since October 2021, and possibly the final one as the economy is slowing significantly due to weakening external demand. The US and Europe banking turmoil has had limited impact on Singapore’s banking system and economy so far. The Fed’s liquidity facilities and deposit guarantees are helping to stabilize financial markets and calm depositors at the troubled banks. The S$NEER is trading at around +1.5% above the implied mid-point, or at the upper half of the band, by our estimates. We forecast 3M SORA climbing to 3.7% (from current 3.5%) by year-end, predicated on one more +25bps Fed rate hike. Tightening monetary conditions and rising interest rates are dampening loan demand. System-wide loan growth contracted by -4.2% in Jan 2023, led by business loans.
Core Inflation Sticky, Expect MAS to Raise Core Forecast Range
We raise our forecast for average core inflation to 4.5% (from 4%) given sticky core inflation, but maintain our forecast for headline inflation at 6%. MAS will likely raise its 2023 core inflation forecast to 4% to 5% (from 3.5% to 4.5%) but maintain its headline inflation forecast at 5.5% to 6.5%. Core inflation (+5.5% in Jan-Feb) remains sticky with broad price increases across food, retail, and services. Expansion of the Progressive Wage Model to food services may fan food price pressures. Prices of retail & other goods and services will likely remain elevated with the 1%pt GST hike in Jan 2023 and tight labor market. Headline inflation (+6.5% in Jan-Feb), on the other hand, is easing on the back of slowing private transport costs due to high base effects from last year’s surge in COE premiums. Accommodation cost is likely nearing its peak as more supply of HDB flats and condominiums will become available in the market in the second half of the year.
Decoupling from US Recession as China Reopens
The global banking turmoil may exert a deflationary impact on growth and prices. Inflation could fall a lot more quickly in the coming quarters, as tightening global credit conditions and rising short-term interest rates dampen investment and consumer spending. Probability of a US recession has risen to 58% over the next 12 months, by our model estimates based on the 3m-10y Treasury yield curve. Singapore’s GDP growth is highly correlated (0.38) with US growth historically. Probability of a Singapore recession has risen to 30%, higher than the 22% in March 2008 (prior to GFC). China’s reopening has not had a meaningful impact on manufacturing and exports so far, but we expect a more visible impact on growth from the second quarter onwards, which should help decouple Singapore from a US recession.
Growth to Slow in 1Q, “Two-Sided” Economy
Flash 1Q23 GDP is expected to come in at around +1.1% on a year-on-year basis (vs. +2.1% in 4Q), the slowest pace since 4Q 2020. On a quarter-on-quarter seasonally adjusted basis, GDP is expected to rise by +0.5% (vs. +0.1% in 4Q), avoiding a contraction and a potential recession. Singapore’s “two-sided” economy is characterized by the divergence between the external-oriented and reopening sectors. Weaker growth is due to the sharp manufacturing contraction (-5.9% in Jan-Feb) and slowing external-oriented services (wholesale trade, water transport, finance & insurance). Hospitality and consumer-related services (accommodation & food services, retail trade, and air transport) are more resilient. Construction will be the bright spot, extending its double-digit growth with the return of foreign workers. We are forecasting GDP growth at 1.7% in 2023, slightly above the mid-point of MTI’s forecast range of 0.5% to 2.5%, and expect Singapore to skirt a technical recession due to China’s reopening boost.