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Singapore's next big challenge is already here

·5-min read

“The world is not likely to return anytime soon to the low inflation levels and interest rates that we have enjoyed": PM Lee.

To listen to Singapore’s leader, the Bank of England (BOE) nailed it. The UK central bank’s warning of a tough new era that sent shockwaves through the world of monetary economics resonated in the city-state. The tiny republic that’s staked its survival on the ebbs and flows of global capitalism is girding for a protracted period of slacker growth and a drawn-out fight against inflation.

Singaporeans initially enjoyed robust growth coming out of Covid, but need to adjust to a less-favourable financial and strategic environment. That was the dour message from Prime Minister Lee Hsien Loong on the eve of Tuesday’s celebrations marking the nation’s 57th birthday. “The world is not likely to return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades,” Lee said.

Singapore had its share of fumbles, but it looks good now, especially when compared to the debacle of Hong Kong’s pandemic response. Even so, its next challenge is here.

Borrowing costs are climbing in almost every economy and global growth is losing altitude. That’s a familiar message to central bank watchers, though few heads of government have laid the shift out as starkly to the citizenry. Even in the annals of monetary policy, the BOE’s pronouncement days before Lee’s remarks was startling: A long recession will begin soon, unemployment will go up and inflation will remain elevated. Don’t look for rate cuts to alleviate the downturn. “To our knowledge, no central bank has ever published as negative an economic forecast (relative to the private sector consensus) as the Bank of England’s latest,” Jan Hatzius, chief economist at Goldman Sachs Group Inc., wrote in a report Monday.

Inflation in Singapore is low relative to many advanced economies at 4.4%, excluding private transport and accommodation. It’s nevertheless accelerating; June’s reading was the highest in almost 14 years. The Monetary Authority of Singapore reckons inflation will peak next quarter, before easing toward the end of the year. Given the experience of most central banks who were surprised by the force of price increases, it would be unwise to bet the house on that. Policy has been tightened four times, beginning last year, and economists foresee the MAS tapping the brakes at least once more.

The core level inflation obscures some of the pain most households feel. The all-items consumer price index climbed 6.7%, quicker than most economists had forecast. “I know the cost of living is at the top of everyone’s minds,” Lee said. Residents are wrestling with spikes in electricity charges, contending with big jumps in rent, moaning about the cost of taxis and ride-hailing services and spiralling costs of home renovations. Singapore, which is about half the size of Maui, imports much of what is consumed on the island.

The march of inflation has been accompanied by eroding growth. Gross domestic product shrank last quarter from the prior three months, the government reported Thursday; economists had forecast a small increase. The government cut its full-year projection to growth of between 3% to 4%, down from 3% to 5%. As with the US, the labour market simultaneously remains pretty warm. At conferences and business gatherings, executives frequently complain about the lengths rivals will go to in poaching staff, even waiting outside bathrooms to make a pitch to employees on their way back from a break.

Another issue Singapore, and Southeast Asia, need to adjust to is the less rosy economic conditions in China. The decades that Lee put in the rear-view mirror were also characterized by a China that surged after its entrance to the World Trade Organization in 2001 and propped up the region with a costly stimulus program in 2008. Since then, it’s been on a gentle glide down to a more sustainable, but still enviable, pace of growth. The Covid era has brought a rude awakening. Beijing’s expansion won’t always be as sluggish as the second quarter’s 0.4%, let alone the contraction at the start of 2020. But it faces a banking and real estate crisis, an ageing population and the economic fallout of heightened tensions with the US.

Lee warned of a bumpier time between the US and China. No Asian leader thinks the strained ties between the superpowers is a good thing, but adding it to Singapore’s national day message elevates the concerns. The city grew rich during a period of stability and rapid growth in much of Asia, a time characterized by an expanding Chinese commercial footprint and US strategic dominance.

How does Singapore steer through these shoals? Sure, monetary policy can manage short-term fluctuations in the economy. Fiscal measures can also alleviate inflation’s bite; Lee foreshadowed more steps in that direction. But a series of shocks adds up to an environment much less conducive to the success of small global financial hubs. The power of Singapore’s mighty public sector can be a cushion to absorb change: From aviation, banking, healthcare and daycare to supermarkets and convenience stores, the reach of the state and its partners is enormous. That’s useful for resilience in times of crisis. If the new normal calls for nimbleness, Singapore may have its work cut out.

Lee is right to put us on notice.

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