Managing director Ravi Menon said Singapore risks being hit by inflation and protectionism.
Amidst risks arising from the global economy, Singapore’s economy is expected to remain on a steady expansion path in 2018 and overall GDP growth to hit 2.5-3.5% in 2018, Monetary Authority of Singapore (MAS) managing director Ravi Menon said.
For the MAS annual report, Menon said they are closely watching the global growth cycle, which is “probably past its peak,” and tail risks to growth that have grown significantly over the last six months.
He said that amongst the “three bears” to the “Goldilocks” state of the global economy he mentioned six months ago, inflation and protectionism have been sighted.
The US has reached the Fed’s 2% target amidst a tightening labour market, he said. “The expectation now is for two more rate hikes this year. But if inflation surprises on the upside, the Fed could be compelled to hike more.”
Consequently, some firms could face debt-servicing problems, emerging markets could face the withdrawal of US dollar liquidity from global markets, and US dollar funding could face tightening amidst increased issuance of US Treasury bills.
“This is to be expected,” Menon said. “But if the withdrawal of US$ liquidity becomes more acute, some emerging market economies could face serious bouts of financial volatility.”
However, Asian economies like Singapore are expected to be in a stronger position to absorb these financial shocks. “Foreign reserves and bank capital buffers are larger whilst financial regulatory frameworks are more robust. Policymakers in Asia are more prepared to make macro-policy adjustments as needed, including pre-emptive interest rate hikes to support exchange rate stability,” he added.
The second risk, Menon said, is rising protectionism. “Protectionism is rearing its ugly head on three trade fronts: US-China; US-EU; and US-Mexico-Canada,” he added.
Whilst the immediate effect of these trade restrictions is limited and does not threaten global growth, he said, “Real risks from the tariffs are spillover effects, escalation, and economic uncertainty—all of which could severely undermine global growth.”
Bilateral trade between the US and China indirectly contributes to about 1.1% of Singapore’s GDP, he noted. Flows between the US and EU contribute about 0.5% to Singapore’s GDP. NAFTA trade contributes 0.6%.
Menon is particularly concerned about Singapore’s role as a “node” in the regional electronics production value-chain as well as a “hub” for air & sea transport and financial intermediation services.
However, he noted that Singapore’s trade-related cluster—manufacturing, wholesale trade, transport and storage, making up about 45% of GDP—will continue to benefit from external demand and the global tech cycle.
“There is a structural upshift in the end-demand for semiconductors globally. Chips are now being used across a wide range of applications beyond computers - including in smartphones, automotives, and “Internet of Things” (IoT) devices,” he said.
The modern services cluster—financial, ICT, and professional services, making up 30% of GDP—will continue to benefit from firm regional demand and ongoing digital transformation among corporates, he added.
Meanwhile, the domestic-oriented cluster—construction, retail and food, health and education services, making up 25% of GDP—has lagged somewhat but is expected to catch up in the quarters ahead.
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