SINGAPORE – The local economy wrapped up 2024 on a positive note but it may be heading for a rough patch, with trade tensions and geopolitical conflicts heightening uncertainty over growth, inflation and interest rates, say analysts.
A trade war is sure to ensue if President-elect Donald Trump, who takes office on Jan 20, goes ahead with his plan to increase tariffs by as much as 20 per cent on imports from all trading partners, and by 60 per cent on shipments from China.
It is not clear how such extreme measures will be implemented, or what their lasting impact on the global economy will be.
However, analysts agree that Trump’s decisive election victory gives him the legitimacy to pursue his protectionist agenda, which will hit economies that depend on trade, such as Singapore.
A recent Monetary Authority of Singapore (MAS) survey showed financial institutions here were most concerned that intensifying trade tensions could impact growth and reignite inflation.
They were also worried about geopolitical risks, such as the renewed conflict in the Middle East and Ukraine, leading to larger and more frequent breakdowns in global supply chains, which will raise business costs.
Experts say slower growth and higher expenses usually result in fewer job opportunities and smaller pay gains, as firms halt expansion plans and cut costs.
A separate MAS report said small and trade-dependent economies could be hit by costlier imports, compounded by slower global growth that could suppress demand for exports. Additionally, interest rates would remain higher for longer, while the US dollar would strengthen.
The gloomy outlook for 2025 comes at the end of a surprisingly good year for Singapore’s economy.
An unexpected surge in exports and manufacturing in the third quarter led to an upgrade of the full-year economic growth forecast by the Ministry of Trade and Industry (MTI). Private economists followed suit, crediting a surge in trade transactions ahead of Trump’s tariffs.
The MTI raised its projection for 2024 gross domestic product (GDP) growth to 4 per cent, up from an earlier estimate of 2 per cent to 3 per cent, and up from 1.1 per cent in 2023.
However, it widened the GDP growth forecast range to around 1 per cent to 3 per cent for 2025, basing it on an expected slower growth in two of Singapore’s top trade partners – the US and China.
Analysts believe the MTI forecast does not include the impact of the expected trade war.
For instance, Ms Selena Ling, OCBC Bank’s head of research and strategy, estimated that the new round of tit-for-tat US-China tariffs would shrink trade volumes worldwide and slice Singapore’s growth rate by at least 1 percentage point from the top end of MTI’s range.
Assuming the US increases tariffs on China in a phased fashion, hiking by only 15 per cent in 2025, Morgan Stanley estimated Asia’s GDP growth to an average of 4.1 per cent in 2025, from 4.5 per cent in 2024, with export-driven economies taking the bulk of the brunt.
Mr Chetan Ahya, Morgan Stanley’s chief Asia economist, said Singapore’s GDP growth will slow to 1.5 per cent in 2025, down from an estimated 2.8 per cent in 2024.
While a slowdown usually puts downward pressure on inflation, tariff increases may counter that disinflationary impulse, leading many analysts to lower their forecasts for 2025 inflation.
However, the MAS has kept its estimate of 1.5 per cent to 2.5 per cent for core inflation in 2025, noting: “Rising protectionism may weaken the capacity for international trade to cushion domestic inflationary pressures.”
The resultant dynamics could induce a pause in monetary easing that could halt interest rate cuts, or even cause a pivot to interest rate hikes, it added.
The signals from the last US Federal Reserve meeting in December were quite telling.
The Fed now projects that it might implement only two additional quarter-point interest rate cuts in 2025, down from an earlier estimate of four. The US central bank also raised its inflation forecast for 2025 from 2.1 per cent to 2.5 per cent – significantly above its 2 per cent target.
A scenario of fewer rate cuts in the US would limit the downside for short-term Singapore rates, such as the Singapore Overnight Rate Average (Sora), which influences mortgage rates.
Mr Eugene Leow, DBS Bank’s rate strategist, said the three-month Sora hovering around 3 per cent may ease to 2.88 per cent in 2025, much less than the 0.6 percentage point drop since September 2024 when the Fed started its rate-cutting cycle.
“For Asia, caution will prevail… We suspect that the current external environment may be too volatile for embarking on further easing just yet,” Mr Leow added.
The US dollar could also become a major source of inflationary pressure on economies such as Singapore, which imports almost everything it consumes.
The US dollar is perceived by investors worldwide as a reliable store of value, particularly in times of economic turbulence, so it may become the preferred asset for many investors in 2025 if the outlook grows more uncertain.
A stronger dollar translates into higher import costs and weaker local currencies, which can elevate inflation or at least slow the rate of price declines.
The MAS may have some flexibility, since it uses the Singapore dollar’s trade-weighted value to manage inflation. However, if the currencies of key regional trade partners are weakening, it may find it challenging to ease the pace of Singapore’s dollar appreciation.
Ms Joey Chew, head of Asia FX research at HSBC, said 2025 might turn out to be the fifth straight year of depreciation versus the greenback for Asian currencies.
“We believe the combination of cyclical, fiscal and political forces will invigorate the US dollar,” she said.
Ms Chew said the four main risks to Asian currencies will be a Fed that is more reluctant to cut rates, depreciation of the Chinese yuan due to highly punitive US tariffs, universal tariffs on all US imports and a sharp depreciation of the euro currency.
She believes currencies of regions that have relatively low interest rates, such as Singapore, South Korea, Taiwan and Thailand, will likely come under more pressure.
Ms Chew lowered her forecast for the Singapore dollar to 1.38 to a US dollar by the end of 2025, down from an earlier prediction of 1.30. The local dollar traded at around 1.35 on Dec 30.
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