Singapore’s global growth warning is on the money

Inflation hawks don’t quite have things their way. Singapore’s central bank tightened policy on Friday to a relatively modest extent and signaled significant concerns about the health of the global economy. The city-state seems reluctant to move too quickly to bring prices under control.

The Monetary Authority of Singapore, which uses the exchange rate as its main tool to steer the economy, has allowed the local dollar to strengthen. Such a step was widely anticipated; inflation is too high and may get worse. But the MAS has also refrained from taking more aggressive measures that would accelerate the pace of currency appreciation and cause a broad slowdown in growth.

The move plunges Singapore into the intensifying global debate over how far and how fast central banks should go in response to soaring inflation. The Federal Reserve is on the cusp of a fourth straight hike in its benchmark interest rate after inflation hit a 40-year high last month. The Fed’s rush to slow the economy has boosted the dollar and created great strains in global finance, especially for emerging markets. The Fed is not alone: ​​after a slower start, the European Central Bank raised its key rate by 75 basis points, the first step of this magnitude on the part of the ECB. The Bank of England should take drastic measures to contain inflation. (The BOE is also grappling with a falling currency and struggling bond market.)

Singapore, given its dependence on global trade and capital flows, is acutely aware of the grim picture. The fight against inflation is not over, but the MAS nodded to the prospect of a global meltdown in a sobering assessment. “Over the coming quarters, the slowdown in economic activity due to the synchronized tightening of monetary policy globally will intensify,” the authority said in a statement. “Further shocks, including geopolitical tensions, could drive up inflation and trigger year-round recessions in some key economies,” he added.

All is not dark and catastrophic. Singapore’s domestic economy rebounded nicely in the last quarter, reflecting what is almost a full reopening from Covid-induced restrictions. After a contraction in the second quarter, gross domestic product rose 1.5% from July to September compared to the previous three months. Economists expected the expansion to be about half that pace. Compared to a year earlier, growth was also better than expected.

It’s not hard to see signs that Singapore is bustling, at least for now. Changi Airport is buzzing, hotels are expensive and hard to find, and taxi and cab fares are a constant source of complaints. Rents are skyrocketing. Unemployment is low. The restaurants are crowded. Congestion is back on the central freeway. Record crowds attended Singapore’s first Formula 1 motor race in three years and nightclub tables cost up to $70,000 a night.

It’s great that Singapore has avoided a return to recession, but such good times are unlikely to last. Weakening global demand will weigh close to home, the MAS said. While inflation is likely to slow significantly towards the end of next year, “there is considerable uncertainty surrounding the outlook for inflation and growth,” the central bank warned in its announcement on Friday.

It was Singapore’s fifth tightening leg since it began to adjust a year ago. The MAS was among the first to fight inflation, along with the Bank of Korea and the Reserve Bank of New Zealand. These last two central banks have shown little sign of adopting a more measured approach, based on the comments accompanying their recent 50 basis point hikes.

Singapore has adopted a more calibrated strategy. Calling the last action a dovish pivot might be a stretch. It is, however, a welcome warning from an economy that has always been overwhelmingly shaped by developments beyond its borders. If the world slips into recession, Singapore will be hit hard. You were warned.

More from Bloomberg Opinion:

• Masks Down, Singapore smiles again at high incomes: Daniel Moss

• Another tale of dove inflation bites the dust: Jonathan Levin

• The BOE risks snatching defeat from Jaws of Victory: Marcus Ashworth

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.

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