SINGAPORE, While the impact from rising trade tensions remains limited thus far with the economy expected to stay on a steady expansion path, Singapore needs to guard against potential spillover effects, said Ravi Menon, 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 alongside the release of the central bank's annual report on Wednesday.
Bilateral trade between the US and China indirectly contributes to 1.1 per cent of Singapore's GDP (gross domestic product). Flows between the US and European Union contribute about 0.5 per cent (while) NAFTA trade between US, Canada and Mexico contribute 0.6 per cent.
These are possible spillover effects, said the MAS chief.
Alongside rapid inflation, protectionism rearing its ugly head has become a growing tail risk for the global economy.
While the immediate impact of tariffs imposed by the US on its key trading partners remains limited � with estimates for these trade restrictions to shave off about 0.1 per cent from China's GDP and the US taking on a similar impact � the real risks lie in the spillovers that can severely undermine global growth, said Menon.
For one, the impact of trade tariffs can go beyond the countries involved to others in the value chains. An escalation where levies are applied to a broader range of goods will also severely impact trade flows and growth, 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.
The world has clearly moved from trade tension to trade conflict, said Menon. If this escalates into a trade war, all three engines of global growth � manufacturing, trade and investment - will stall.
For now, the global economy remains in good shape but given slowing momentum and growing risks, growth "may not be quite as good as last year", he added.
With that, Menon said the central prognosis for the Singapore economy this year remains intact, but spillovers from global trade conflicts bear close watching.
Overall GDP growth for 2018 is expected to be around 2.5 per cent to 3.5 per cent - unchanged from the forecast range announced in May - with the economy likely to remain on a steady expansion path.
Turning to inflation forecasts, the MAS core inflation this year is expected to average in the upper half of the 1 per cent to 2 per cent forecast range.
The CPI-All Items inflation is similarly projected to be in the upper half of the zero per cent to 1 per cent forecast range for 2018, said the central bank chief.
On monetary policy, Menon said this is predicated on baseline projections of growth and inflation, and does not have an aim to pre-empt tail risk scenarios.
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.
The central bank made a measured tightening of its monetary policy in April after keeping to a neutral stance for two years.
Hence in the short term, the policy band provides sufficient room for the Sing dollar nominal effective exchange rate to accommodate modest shocks to the Singapore economy.
Further adjustments to monetary policy will depend on how the economy evolves, as well as updated assessments of inflation and global prospects, Menon added.
Source: NAM News Network