An increase in consumption follows a steep rise in personal savings, reaching a five-year high of US$103 billion.- ST
SINGAPORE (The Straits Times/Asia News Network): Singaporeans are worried about soaring prices, but at the same time a lot of them are still out shopping for stuff they can do without, and in the process stretching inflation out for at least another year.
Such discretionary spending will be the biggest contributor to inflation this year and next, Singapore’s central bank said.
The scenario of consumers driving inflation is rare in Singapore, where price changes are seen as a global phenomenon rather than a function of domestic demand.
Hence, managing domestically driven inflation – while avoiding job losses and an economic downturn – will be a challenge for policymakers, who have already sanctioned aggressive policy measures to douse the pace of price gains.
Analysts believe savings accumulated during the Covid-19 pandemic, wage gains after a strong economic rebound in 2021, and the wealth effect from rising property prices are feeding the pent-up demand for discretionary goods and services such as in retail, food and beverage, and entertainment.
The increase in consumption follows a steep rise in personal savings, reaching a five-year high of $103 billion from $74 billion in 2019.
Meanwhile, personal disposable income and compensation of employees have also been on the rise at least until the second quarter of this year, according to the Department of Statistics’ (SingStat) official data.
While inflationary pressures started to surface in the second half of 2021, they were mainly driven by surging global prices of goods and commodities. Global energy and raw material prices got another boost from Russia’s invasion of Ukraine in February 2022.
Domestic demand started to show up in spiking retail sales only after the near-full reopening of the Singapore economy in April. SingStat data showed private consumption expenditure by households jumped by 16.5 per cent in the second quarter, which was almost twice the gain of 8.3 per cent in the first quarter.
In the third quarter, discretionary spending accounted for half of the increase in core inflation, a measure of price change that excludes accommodation and private transport costs.
Now, the Monetary Authority of Singapore (MAS) estimates that domestic spending on non-essential goods and services will form the bulk of inflation in 2022 and 2023. This is in contrast to 2021 when domestically driven inflation was at an even keel with externally driven price hikes, MAS said in its biannual macroeconomic review last Thursday.
The forecast for elevated inflation is at odds with MAS’ estimate that economic growth will ease in 2022 and may be even lower in 2023 as global demand slows.
Singapore is an export-driven economy, where private consumption accounts for only a third of economic growth. The rest of the economy is driven by manufacturing and modern services such as finance, which are dependent on global demand.
Hence, in previous inflationary bouts, a retreat in global demand was enough to put any surge in domestic consumption at rest – but not this time. While growth in real wages has turned negative on a sequential basis, nominal wage growth is still rising and hiring should remain firm in most sectors, MAS said.
Dr Chua Hak Bin, co-head of macro research at Maybank, said the wage-price spiral may intensify in the coming quarters, with the Progressive Wage Model expanded to cover food services, waste management and occupational sectors from March 2023.
Some pent-up demand was expected as most of the Covid-19 restrictions were lifted earlier in 2022. However, the strength of demand, which had been building up for nearly two years, has come as a surprise.
It explains why the MAS believes core inflation can be higher in 2023 than in 2022 even as economic growth slows to below-trend pace. Analysts estimate the country’s gross domestic product growth to be around 3 per cent.
Growth is set to slow this year to between 3 per cent and 4 per cent, after a 7.6 per cent jump in 2021. Manufacturing is already slowing as global demand for goods has started to wane, while the financial sector will take a hit from rising interest rates and the capital market turmoil.
Irvin Seah, a senior economist at DBS Bank, said consumers should be cognisant of the economic realities, as such pent-up spending against a backdrop of high inflation could have significant implications on their financial wellness. “There is a need to keep discretionary spending in check amid high inflation,” he said.
Seah said that while MAS’ monetary policy framework has worked well in controlling imported inflation, it is less effective in dealing with domestically driven inflation.
The MAS manages import costs by allowing the Singapore dollar to appreciate against the currencies of its trading partners. A stronger exchange rate means individuals and companies can import more with less money.
MAS has reinforced the Singapore dollar’s appreciation bias – referred to by central banks as tightening of monetary policy – five times since October 2021, which it said would dampen core inflation by an average of 1.5 percentage points each year over 2022 to 2023.
Yet its forecast for 2022 core inflation stands at 4 per cent, the highest level in 14 years. In 2023, taking into account all factors including the goods and service tax hike due in January, core inflation is forecast to average 3.5 per cent to 4.5 per cent.
The upper end of that forecast range shows that core inflation in 2023 can be even higher than this year. The lower end is also well above the 1.5 per cent average for core inflation in the decade before the pandemic.
This also means that even a slowing economy is having a limited impact on inflation.
However, analysts said a significant economic slowdown expected for next year and higher interest rates will eventually start to weigh down jobs growth and wage increases, and in turn dampen growth in discretionary spending.
