Manufacturing activity is slowing after a robust showing throughout 2021. The travel-related and domestic consumer-facing sectors are strong, as domestic mobility indicators have returned to pre-COVID levels. It is estimated that domestic economic output has reached close to its pre-pandemic trajectory (i.e., the present level of GDP envisaged in January 2020). Singapore’s GDP growth is likely to come in between 3 and 4% this year, which would bring the average pace of expansion over 2021-22 to around 5.5%. This outlook is strongly predicated on the prospects for Singapore’s three main final demand markets – China, ASEAN-5 and the US. [2] Growth will be led by the domestic-oriented and travel-related sectors, while the contribution of the trade-related sectors could retract from last year. Ongoing costs pass-through Core inflation rose to 3.8% y-o-y in Q2, reflecting both imported cost-push and broader demand-pull pressures. Core inflation is expected to remain elevated this quarter, as previous global cost shocks continue to transmit through the domestic economy. With domestic demand picking-up amid a tight labour market, consumer services inflation is likely to feature more prominently. Several results from the econometric work done by the Economic Policy Group in MAS are notable:  First, global food and energy shocks impact headline inflation within one quarter of the shock and continue to pass through to final prices for at least the next six months. Second, domestic cost increases as proxied by wages in the services sector pass through moderately to prices mainly within the following quarter.

IS Schedule Interest rate sensitive sectors need to respond sufficiently to the tightening of policy in order to moderate demand, without tipping the economy into a sharp or broader downturn. Tighter financial conditions can restrain demand via transmission channels working through higher mortgage rates, more selective credit underwriting and wealth effects from lower equity prices. If these channels begin to restrain growth in 2022 at a time when corporate and household balance sheets are still strong, they contribute to achieving a soft landing. Phillips Curve Combined with labour supply improvements, employment needs to moderate sufficiently to cool wage growth without eliciting a sharp rise in the unemployment rate. Some relief could come from a rise in the LFPR. Post-Covid normalisations could see the return of some of the “missing” 1-1.5 million workers that have exited the labour force because of the pandemic. The present strength in labour demand is reflected in an unusually high ratio of two vacancies for each unemployed person. Some reduction in vacancies will not generate negative income effects in the same way that outright layoffs would. For a “soft landing”, the Non-Accelerating Inflation Rate of Unemployment (NAIRU) would have to converge to its lower pre-Covid level at a faster pace than actual unemployment rises. A return of the NAIRU to its value before 2020 would verify the absence of labour market scarring. Soft Landings A recent Bank for International Settlements (BIS) study [1] usefully identified some stylised facts on hard versus soft landings in the global economy.