Singapore needs to watch out for spillover effects from trade tensions: MAS

05-Jul-2018 Intellasia | | 6:02 AM Print This Post

While the impact from rising trade tensions remains limited thus far, Singapore needs to guard against potential spillover effects, said Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS).

This is due to the country’s role as a node in the regional electronics production value chain, as well as a hub for air and sea transport and financial intermediation services, he said at the release of the central bank’s annual report on Wednesday (July 4).

“Bilateral trade between US and China indirectly contributes to 1.1 per cent of Singapore’s gross domestic product (GDP). Flows between the US and the European Union (EU) contribute about 0.5 per cent of Singapore’s GDP,” he said. “These are possible spillovers.”

With protectionism rearing its ugly head, Menon described this as a rising risk to the global economy.

While the immediate impact of these trade restrictions remain “limited” and does not threaten global growth yet, he said the real risks lie in the spillover effects where impact of the tariffs will be felt not only in the countries involved, but across the value chains that span several countries.

If tariffs are applied to a broader range of goods in the scenario of an escalation, trade flows will be severely impacted, he added.

Meanwhile, the threat of further escalation is beginning to dampen business sentiments and unsettle financial markets. “If businesses around the world take a wait-and-see approach to global recovery, investment will be curtailed,” he said.

All of these “can severely undermine global growth”, he said.

“The world has clearly moved from trade tension to trade conflict. If this escalates into a trade war, all three engines of global growth manufacturing, trade and investmentswill stall. While the central prognosis for the Singapore economy this year remains intact, spillovers from global trade conflicts bear close watching.”

For now, the Singapore economy is expected to remain on a steady expansion path, with overall GDP growth estimated to be at around 2.5 per cent to 3.5 per cent.


Moving on to inflation, Menon said that has been on a modest uptrend though still below historical norms.

MAS core inflation this year is expected to average in the upper half of the 1 per cent to 2 per cent forecast range, he said. The CPI-All Items inflation is similarly projected to be in the upper half of the 0 per cent to 1 per cent forecast range for 2018 as a whole.

On monetary policy, the MAS made a measured tightening of its monetary policy in April after keeping to a neutral stance for two years.

Menon said Singapore’s monetary policy is predicated on baseline projections of growth and inflation, and does not aim to preempt tail risk scenario.

“While we are closely watching global risks, our baseline forecast is continued economic expansion and gradually rising inflation. The threat of a destructive trade war has risen but remains a tail risk for now.”

As such, the MAS’ approach is to embark on monetary policy normalisation, but to do so in an “incremental fashion” in view of still-benign inflation and growing trade-related tail risks.

In the short term, the policy band provides sufficient room for the SGD NEER (nominal effective exchange rate) to accommodate modest shocks to the Singapore economy.

Further adjustments to monetary policy will depend on how the economy evolves and our updated assessments of inflation and global prospects,” he said.


Category: Singapore

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