Singapore 'Unlikely' To Have Recession After Fed Hike But Near-Term Risks Remain, Say Economists

May 9, 2022

Expectations for Singapore's monetary policy or growth trajectory were largely unshaken by Wednesday's (May 4) rate hike in the United States, and a recession looks unlikely for now -- though some economists still see a risk of a slowdown, independent of the Fed's decision.

Expectations for Singapore's monetary policy or growth trajectory were largely unshaken by Wednesday's (May 4) rate hike in the United States, and a recession looks unlikely for now - though some economists still see a risk of a slowdown, independent of the Fed's decision.

In Singapore, interest rates should rise in tandem, but likely to a smaller extent, said economists, thanks in part to the Monetary Authority of Singapore's (MAS) three consecutive moves to tighten monetary policy over the last 6 months.

Intent on fighting the worst inflation in 40 years, the Federal Reserve announced a 0.5-percentage point rate hike, a move the markets appeared prepared for even if this was the Federal Open Market Committee's (FOMC) largest increase since 2000.

"Since MAS already has started its normalisation process, the impact will be less in Singapore than in economies whose central banks are still waiting to begin this cycle," Denise Cheok, assistant director at Moody's Analytics, told The Business Times (BT).

"There is less of a chance in Singapore that a widening differential of interest rates between the SGD (Singapore dollar) and the USD (US dollar) would entice capital flows away from Singapore towards the US," she added.

Unlike most other countries, Singapore's central bank uses its exchange rate as a lever for its monetary policy settings, by making adjustments to the Singapore dollar nominal effective exchange rate (S$NEER) policy band.

Economists said they are not ruling out a fourth tightening in October, but added that this is likely to depend on how core inflation tracks in the coming months, rather than the Fed's moves.

"That basically means that domestic drivers or domestic price levels will be much more influential as to how fast and how severe the tightening is going to be like," said UOB economist Barnabas Gan, adding that he is expecting "only a slight tightening" next.

Moody's Cheok added that MAS’s policy actions have so far been in response to "higher supply-side inflation", caused by the Russian invasion of Ukraine and China’s zero-Covid policy, rather than the broader interest rate environment.

Noting that an unscheduled tightening is "not really on the cards for now", OCBC chief economist Selena Ling said: "Our base case is that the window for another tightening in the October Monetary Policy Statement is not closed, but after three moves, especially with the April move being a double-barrel move, the bar is quite high from here."

ING senior economist Nicholas Mapa believes the MAS is likely to "wait it out" and gauge the effectiveness of its recent moves, particularly since a stronger SGD, from further tightening, could hurt the competitiveness of the Republic's exports.

Although Singapore's leaders have warned about the possibility of a recession, economists told BT it is unlikely to occur this year.

"We currently do not forecast a recession for 2022. Export demand still remains relatively robust, while the easing of domestic Covid-19 measures and the reopening of borders will push up consumer spending," said Moody's Cheok.

Concurring, UOB's Gan said: "Our Singapore GDP outlook still remains at 3.5 per cent, but given that there is somewhat stronger-than-expected high frequency data from industrial production and exports since the beginning of this year, that basically suggests that there can be some upside risk to our (outlook)."

But this has to be balanced with other risks - chiefly the Ukraine war, the slowdown in China and new Covid-19 variants.

For these reasons, Maybank senior economist Chua Hak Bin believes Singapore's growth is likely to slow this year but remain positive, with the probability of a recession at a low 6 per cent over the next 12 months.

In an environment of higher rates, higher inflation and possibly slower growth, the risk of stagflation has also risen both globally and for Singapore, said OCBC's Ling.

"For the US, the more the FOMC frontloads monetary policy tightening, the higher the risk of a policy mistake precipitating a sharp slowdown ahead. If any or both of the US and Chinese economies face a hard landing, then this could definitely impact Singapore’s growth prospects," she said.

Maybank's Chua added: "An overzealous Fed bent on killing inflation may however tip the US economy, and Singapore along with it, into recession in 2023-24. Aggressive Fed rate hikes above 3.5 per cent in 2023 may invert the yield curve and produce a recession."

Credit: Business Times

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