Written by Mali Chivakul, EM economist at J Safra Sarasin Sustainable Asset Management
Singapore suffered from high inflation in the last two years. Headline inflation trended down in 2023, but core inflation remains sticky and the labour market tight. The economic recovery was stronger than expected last quarter as the manufacturing sector turned around following the global tech cycle upswing. Latest PMIs suggest that the recovery should continue into this year. House prices have continued to increase even after curbing measures. Weaker housing demand and additional supply should dampen price increases in 2024. With lingering inflation concern, the Monetary Authority of Singapore is likely to maintain its policy stance in the first half of this year.
Singapore’s economy rebounded at the end of last year
Singapore’s economy recovered from the manufacturing slump at the end of last year. Driven by a pick-up in construction and manufacturing, GDP rose 2.8%, higher than expected by analysts. The manufacturing recovery has been driven by the upswing in the global tech cycle. Latest PMIs suggest that the recovery should be sustained in the next few months as new orders markedly improve towards the end of last year. Whole economy PMI also suggests that the recovery should broaden out.
Core inflation remains sticky
Headline inflation, which shot up in 2022, trended down quickly last year as goods (including food) prices fell. Services inflation which picked up more moderately has been steady for most of last year, however. That has kept the Monetary Authority of Singapore (MAS)’s core inflation measure above its (unofficial) 2% target. Services inflation has been driven by a tight labour market. While foreign workers returned after the pandemic, labour demand remains relatively high, compared to the past.
House prices increased further in 2023, but should stabilize in 2024 given lower demand and higher supply
Private house prices picked up further in 2023 despite further tightening measures to slow demand, with an annual increase of 6.5% in Q4. The authorities introduced a number of measures such in April 2023 in order to curb demand and price pressures, such as a doubling of stamp duties for foreign buyers. While that had some effects on demand, they were not sufficient to stop price increases. Still, property transactions dropped to the lowest level in 2023 in December, indicating lower demand. At the same time, housing supply should increase in 2024 as projects under construction in 2023 come onto the market. Lower demand and higher supply should lead to price stabilization in 2024. Rent increases should also be dampened as the labour market, including the influx of foreigners, normalises.
MAS to maintain its tight stance
Given sticky core inflation, we expect the MAS to maintain its tight monetary policy stance. Higher energy prices due to the increase in carbon taxes at the beginning of 2024 should also leave the MAS more cautious as it watches for any second round effects on inflation. That means that it will likely keep the Singapore dollar nominal effective exchange rate’s pace of appreciation unchanged. That also implies that the SORA interest rate should stay around the same level in the first half of this year.
