SINGAPORE: Inflation is expected to "ease progressively" over 2027 in line with global energy prices, but a prolonged disruption to energy supplies risks driving up inflation and stifling economic growth here, the Monetary Authority of Singapore (MAS) said in its latest quarterly macroeconomic review on Tuesday (Apr 14).
"The trajectory of inflation beyond 2026 will depend heavily on global energy and food prices, as well as growth developments," said MAS, noting that even if supplies from the Middle East resume, global oil prices are expected to remain elevated for some time.
Prices are already starting to tick up in Singapore and MAS said inflation should eventually peak and decline, in line with the projected moderation in global energy prices. But the risks to the inflation outlook are tilted to the upside, said the central bank.
"A prolonged disruption to global energy supplies or the unexpected implementation of export controls would lead to even higher import costs for Singapore, and pose upside risks to inflation alongside downside risks to growth," the report said.
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Household real incomes, which take inflation into account, are likely to be eroded as higher prices of imports feed into domestically produced goods and services. That could then dampen aggregate demand.
In Singapore, GDP growth for 2026 is expected to "step down" from the 5 per cent reported last year, with the slowdown expected to be broad-based across various sectors, MAS said.
The output gap - defined as the economic measure of the difference between the actual output of an economy and its potential - is expected to average around zero per cent this year.
"In the near term, global AI demand is unlikely to unwind abruptly due to committed investments, which in turn should support domestic activity, particularly in the technology-related segments," said MAS.
But a more uncertain macroeconomic backdrop and tighter financial conditions could weigh on demand in the latter part of the year, the central bank added.
For example, higher energy prices could feed through to production costs, erode real incomes and weigh on consumption and investment.
MAS also noted that the damage to energy infrastructure during the conflict could have "enduring constraints on downstream production inputs", which are expected to have "sustained" effects on the Singapore economy.
Downside risks to growth will "compound" if the energy crisis becomes prolonged, MAS said.
"All in, the impact from the Middle East conflict will weigh on Singapore's economic activity in the coming quarters, although the extent remains uncertain given the evolving developments," said the central bank.
Different sectors see differing levels of impact depending on their degree of reliance on energy.
The most energy-dependent industries include petroleum, gas and electricity, petrochemicals, basic chemicals, transportation and water and waste services.
"Energy inputs exceeded 10 per cent of total input requirements in each of these industries, which together comprise about 10 per cent of overall GDP," the report said.
The chemicals industry has been more affected because of disruptions to critical inputs, but this could potentially spillover to other areas.
MAS said the indirect impact is estimated to be the most pronounced for Singapore's wholesale trade sector, which comprises 19 per cent of GDP. Around half of the sector's input requirements are from the energy-intensive transport and storage sector, especially water transport services.
Domestic-oriented sectors likely will also face mounting cost pressures and operational challenges, with land transport operators being most directly affected.
"Recent anecdotal reports have also pointed to rising petroleum-based material costs in construction, while food & beverage operators could face higher utility, plastic packaging and raw material costs," said the report.
In the technology sector, artificial intelligence (AI) demand remains strong, but could be disrupted by supply shocks, higher costs and tighter financial conditions.
A disruption in the supply of critical inputs could cause the global AI cycle to "unravel", said MAS.
For example, the Middle East is a big producer of helium, which is used to produce semiconductors.
If supply shortages emerge in semiconductors, prices for servers and networking equipment could go up, said MAS. Together with higher energy costs, data centres' operating costs will increase.
Continued uncertainty and a higher inflationary environment could also affect investment sentiment in the AI ecosystem, said the central bank.
The current energy shock is likely to be more systemic and sustained than past energy crises, said MAS on the global economy outlook.
If energy supplies are interrupted for a longer period of time, there could be "disorderly corrections" in asset prices.
"The ensuing demand destruction from a combined energy and financial shock will be more severe, weighing heavily on growth in the global economy and subsequently generating disinflationary pressures into 2027," the report said.
Countries with lower energy, fiscal and external reserve buffers would be the most vulnerable, while "contagion" could take hold in financial markets if risk-off dynamics are amplified.
In this scenario, global growth would be expected to drop sharply even as inflation stays high in 2026, said MAS.
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"The trajectory of inflation beyond 2026 will depend heavily on global energy and food prices, as well as growth developments," said MAS, noting that even if supplies from the Middle East resume, global oil prices are expected to remain elevated for some time.
Prices are already starting to tick up in Singapore and MAS said inflation should eventually peak and decline, in line with the projected moderation in global energy prices. But the risks to the inflation outlook are tilted to the upside, said the central bank.
"A prolonged disruption to global energy supplies or the unexpected implementation of export controls would lead to even higher import costs for Singapore, and pose upside risks to inflation alongside downside risks to growth," the report said.
CNA Games
Show More Show Less
Household real incomes, which take inflation into account, are likely to be eroded as higher prices of imports feed into domestically produced goods and services. That could then dampen aggregate demand.
In Singapore, GDP growth for 2026 is expected to "step down" from the 5 per cent reported last year, with the slowdown expected to be broad-based across various sectors, MAS said.
The output gap - defined as the economic measure of the difference between the actual output of an economy and its potential - is expected to average around zero per cent this year.
"In the near term, global AI demand is unlikely to unwind abruptly due to committed investments, which in turn should support domestic activity, particularly in the technology-related segments," said MAS.
But a more uncertain macroeconomic backdrop and tighter financial conditions could weigh on demand in the latter part of the year, the central bank added.
For example, higher energy prices could feed through to production costs, erode real incomes and weigh on consumption and investment.
MAS also noted that the damage to energy infrastructure during the conflict could have "enduring constraints on downstream production inputs", which are expected to have "sustained" effects on the Singapore economy.
Downside risks to growth will "compound" if the energy crisis becomes prolonged, MAS said.
"All in, the impact from the Middle East conflict will weigh on Singapore's economic activity in the coming quarters, although the extent remains uncertain given the evolving developments," said the central bank.
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SECTORAL IMPACT
Different sectors see differing levels of impact depending on their degree of reliance on energy.
The most energy-dependent industries include petroleum, gas and electricity, petrochemicals, basic chemicals, transportation and water and waste services.
"Energy inputs exceeded 10 per cent of total input requirements in each of these industries, which together comprise about 10 per cent of overall GDP," the report said.
The chemicals industry has been more affected because of disruptions to critical inputs, but this could potentially spillover to other areas.
MAS said the indirect impact is estimated to be the most pronounced for Singapore's wholesale trade sector, which comprises 19 per cent of GDP. Around half of the sector's input requirements are from the energy-intensive transport and storage sector, especially water transport services.
Domestic-oriented sectors likely will also face mounting cost pressures and operational challenges, with land transport operators being most directly affected.
"Recent anecdotal reports have also pointed to rising petroleum-based material costs in construction, while food & beverage operators could face higher utility, plastic packaging and raw material costs," said the report.
In the technology sector, artificial intelligence (AI) demand remains strong, but could be disrupted by supply shocks, higher costs and tighter financial conditions.
A disruption in the supply of critical inputs could cause the global AI cycle to "unravel", said MAS.
For example, the Middle East is a big producer of helium, which is used to produce semiconductors.
If supply shortages emerge in semiconductors, prices for servers and networking equipment could go up, said MAS. Together with higher energy costs, data centres' operating costs will increase.
Continued uncertainty and a higher inflationary environment could also affect investment sentiment in the AI ecosystem, said the central bank.
SYSTEMIC, SUSTAINED IMPACT ON GLOBAL ECONOMY
The current energy shock is likely to be more systemic and sustained than past energy crises, said MAS on the global economy outlook.
If energy supplies are interrupted for a longer period of time, there could be "disorderly corrections" in asset prices.
"The ensuing demand destruction from a combined energy and financial shock will be more severe, weighing heavily on growth in the global economy and subsequently generating disinflationary pressures into 2027," the report said.
Countries with lower energy, fiscal and external reserve buffers would be the most vulnerable, while "contagion" could take hold in financial markets if risk-off dynamics are amplified.
In this scenario, global growth would be expected to drop sharply even as inflation stays high in 2026, said MAS.
Continue reading...