Middle East conflicts, high interest rates could dampen Singapore’s economic growth

Escalating tensions in the Middle East and risk of a delayed easing in global interest rates could threaten Singapore’s economic rebound this year, according to the central bank’s latest review.

While the Monetary Authority of Singapore stuck to its view that the economy would grow 1 per cent-3 per cent this year, it said in its biannual Macroeconomic Review published on Friday that the outlook depends on the global pivot to monetary easing and a tech upswing.

“There are still lingering risks from higher for longer global interest rates and capital flow volatility,” the MAS said in the report. “An escalation in geopolitical conflicts could also lead to an abrupt increase in financial market stress and heightened uncertainty, dampening global and domestic growth prospects.”

The MAS expects the US Federal Reserve to start lowering borrowing costs in the third quarter, which together with a recovery in global chip sales can help power Singapore’s GDP growth to around its potential rate for the whole of 2024.

The economy expanded just 1.1 per cent in 2023, a pace that Prime Minister-designate Lawrence Wong had said spells trouble should it be sustained for a prolonged period.

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Events of the past week illustrate just how quickly and drastically shocks could wreak havoc on global and domestic economies. Fears of a broader Middle East conflict and higher oil prices spurred sharp swings in currencies, reignited price pressures and a return to hawkish central banking across Asia. Investor bets of a Fed rate cut have been pushed back to later this year, if not next year.

For now, Singapore’s policymakers affirmed their estimate for core and headline inflation to average 2.5 per cent-3.5 per cent this year, saying “in the absence of major fresh shocks to costs, the disinflation trend should reassert itself.”

The central bank kept its monetary policy tight earlier this month, wary of still-elevated price pressures.

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World leaders call for de-escalation after Iran launches air attack on Israel

World leaders call for de-escalation after Iran launches air attack on Israel

“The risks to the inflation outlook continue to evolve amid heightened global uncertainties, including from geopolitical tensions,” the MAS said in its report.

“Barring further shocks, MAS assesses that the prevailing rate of appreciation of the policy band is needed to keep a restraining effect on imported inflation as well as domestic cost pressures, and is sufficient to ensure medium-term price stability.”

Singapore’s economy expanded slower than forecast in the first quarter as the spending boost from tourism and concerts failed to offset the slump in manufacturing.

That underlines the government’s concerns, with Wong warning in his February budget speech that the city state cannot afford a protracted period of slow growth lest it start eroding living standards.

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