As Singapore faces labor shortages and strong manufacturing activity, it is no surprise that it is running its economy above its potential, says Brian Tan, senior regional economist at Barclays.
Even though a stronger Singapore dollar may weigh on export momentum, Tan believes it is precisely what the country needs to cool inflation pressures, which are rising due to strong demand across the board, including in manufacturing and exports.
“The Singapore dollar framework is exactly meant to slow down exports as the Singapore dollar appreciates relative to the policy band, and that will naturally slow down the rest of the economy,” Tan added.
After last Thursday’s announcement by the Monetary Authority of Singapore that it would take another small step to tighten monetary policy to combat inflation, the Singapore currency rose by nearly 0.7% to $1.3963 per dollar. This puts pressure on the expectation that another round of tightening is coming next month.
Labor Market Tightening
Even though Tan hoped for a strong manufacturing sector, the country’s very strong activity has been causing its inflation pressure as the tight labor market is driving wages up.
As of recently, the country has reopened its borders and immigrants have been able to cross back in, but these people are being replenished faster than they are being replaced as many are simply hiring workers in the tourism and hospitality sectors.
The manufacturing sector is already struggling with a labor shortage due to pandemics, Tan said, adding that it has also been trying to find and hire workers, “so there’s very strong competition right now.”
Singapore’s non-oil domestic exports (NODX) grew for the 19th consecutive month last month, increasing by 9% year on year, down from 12% in May, according to Enterprise Singapore data released on Monday.
The majority of the growth in the NODX came from United States, Indonesia, and Malaysia. According to the government agency, electronic shipments increased by 4.1% in June following the substantial 12.9% increase in May. Meanwhile, non-electronic NODX rose by 10.6% in June following the 11.7% increase a month earlier.
Manufacturing and exports will benefit the economy, but there is a shortage of workers to satisfy demand, Tan noted. “It may be prudent to slow [manufacturing and export activity] in order to bring the inflation pressures under control until supply can improve going forward,” Tan added.
As for inflation in Singapore, he pointed out that it will be “key to watch” in the second half of the year.
Tan said reopening the borders has eased some of the labor shortages, but recovery will be gradual.
The inflation rate will be “quite sustained” in the second half, and only begin to cool near year’s end, he said.