Singapore’s next big challenge is already here

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Listening to the leader of Singapore, the Bank of England has understood everything. The UK central bank’s warning of a tough new era that has sent shockwaves through the world of the cash economy has echoed in the city-state. The small republic that has staked its survival on the ebb and flow of global capitalism is preparing for a prolonged period of slow growth and an interminable fight against inflation.

Singaporeans initially enjoyed robust growth in the wake of Covid, but are having to adapt to a less supportive financial and strategic environment. That was Prime Minister Lee Hsien Loong’s austere message on the eve of Tuesday’s celebrations marking the nation’s 57th birthday. “The world is unlikely to return anytime soon to the levels of inflation and low interest rates that we have enjoyed over the past few decades,” Lee said.

Singapore has had its share of escapees, but it’s looking good now, especially compared to Hong Kong’s pandemic response debacle. Even so, his next challenge is here.

Borrowing costs are rising in nearly every economy and global growth is losing altitude. It’s a familiar message to central bank watchers, though few government leaders have presented the change so starkly to citizens. Even in the annals of monetary policy, the BOE’s statement days before Lee’s remarks was startling: a long recession will begin soon, unemployment will rise, and inflation will remain high. Don’t look for rate cuts to mitigate the downturn. “To our knowledge, no central bank has ever issued economic forecasts as negative (relative to the private sector consensus) as the latest from the Bank of England,” Jan Hatzius, chief economist at Goldman Sachs, wrote on Monday. Group Inc., in a report.

Inflation in Singapore is low compared to many advanced economies at 4.4%, excluding private transport and accommodation. However, it is accelerating; The June reading was the highest in nearly 14 years. The Monetary Authority of Singapore expects inflation to peak in the next quarter, before slowing towards the end of the year. Given the experience of most central banks being surprised by the strength of price increases, it would be unwise to bet the house on this. The policy has been tightened four times, from last year, and economists expect the MAS to put the brakes on at least once more.

Core inflation masks some of the pain felt by most households. The all-items consumer price index rose 6.7%, faster than most economists had expected. “I know the cost of living is top of mind for everyone,” Lee said. Residents are grappling with spikes in electricity costs, facing steep rent increases, complaining about the cost of taxis and public transit services, and skyrocketing home improvement costs. Singapore, which is about half the size of Maui, imports much of what is consumed on the island.

The march of inflation has been accompanied by an erosion of growth. Gross domestic product fell in the last quarter compared to the previous three months, the government announced on Thursday; economists had forecast a slight increase. The government cut its projection for the full year to growth of between 3% and 4%, down from 3% to 5%. As in the United States, the labor market simultaneously remains quite warm. At conferences and business meetings, executives frequently complain about rivals’ efforts to poach staff, even waiting outside bathrooms to deliver a speech to employees returning from a break.

Another problem that Singapore and Southeast Asia must adapt to is the less rosy economic situation in China. The decades Lee put in the rearview mirror were also characterized by a China that surged after joining the World Trade Organization in 2001 and propped up the region with a costly stimulus package in 2008. Since then, it’s is gently sliding towards a more sustainable, but still enviable growth rate. The Covid era has brought a rude awakening. Beijing’s expansion won’t always be as slow as the 0.4% in the second quarter, let alone the contraction at the start of 2020. But it faces a banking and real estate crisis, an aging population and the economic fallout heightened tensions with the United States.

Lee warned of a bumpier time between the United States and China. No Asian leader thinks strained superpower ties are a good thing, but adding it to Singapore’s National Day message heightens concerns. The city grew wealthy during a period of stability and rapid growth in much of Asia, a period characterized by an expanding Chinese commercial footprint and American strategic dominance.

How does Singapore navigate through these shoals? Of course, monetary policy can manage short-term fluctuations in the economy. Fiscal measures can also soften the bite of inflation; Lee announced further steps in this direction. But a series of shocks add to an environment much less conducive to the success of small global financial hubs. The power of Singapore’s mighty public sector can be a cushion to absorb change: from aviation, banking, healthcare and child care to supermarkets and convenience stores, the reach of the state and its partners is enormous . It is useful for resilience in times of crisis. If the new normal calls for agility, Singapore could have its work cut out.

Lee is right to warn us.

More from this writer and others on Bloomberg Opinion:

• Let’s not mince words as the economy heads south: Daniel Moss

• In New York, London and Hong Kong? Moving On: Anjani Trivedi

• BOE’s doomsday prophecies fall on deaf ears: 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.

More stories like this are available at bloomberg.com/opinion

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