Commentary: US tariffs won’t cause Singapore inflation to rise, but may slow down growth
Unemployment could edge up, but the Singapore government is putting in place measures to support the economy, says UOB’s Jester Koh.
A cargo ship is seen docked at Pasir Panjang port terminal in Singapore on Feb 3, 2025. (Photo: AFP/Roslan Rahman)
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SINGAPORE: President Donald Trump's long-promised tariffs of 25 per cent on products from Mexico and Canada took effect on Tuesday (Mar 4), as he told reporters there was “no room left” for both countries to avoid the levies.
He also increased tariffs on Chinese imports from 10 per cent to 20 per cent, which prompted tit-for-tat action from Beijing.
There remains significant uncertainty about the magnitude, scope and timing of President Trump’s future tariffs, as he has announced many different iterations. He has proposed tariffs on both adversaries and allies alike and other countries are likely to impose reciprocal duties, as China has done.
Free trade, widely credited for lifting incomes across Asia over the past few decades, has fallen out of fashion. Instead, we could be returning to a more protectionist, mercantilist world, at least for the next few years.
INFLATION LOOKS TO BE UNDER CONTROL
What do these developments mean for Singapore?
As Singapore imports most of what it needs, inflation arising from disruptions to global trade is a big risk. After all, supply chain snags when demand rebounded post-COVID contributed to high inflation in 2022 and 2023.
The situation today, however, is different.
The latest data shows that inflation is likely well under control. Core inflation slowed significantly to 0.8 per cent in January. The latest Consumer Price Index basket exhibits a broad-based disinflation across various key categories including food, clothing and footwear, and recreation.
We now expect core and headline inflation to both hit 1.3 per cent in 2025, below the inflation target of 2 per cent set by most central banks. In fact, disinflation - the process of falling inflation - is so far underway that there are fears of deflation - when inflation turns negative and prices fall year-on-year. That would have deleterious impact on the economy.
WORRIES OVER GROWTH AND UNEMPLOYMENT
Unlike the past few years, the risk in 2025 is slowing growth rather than stubborn inflation.
Singapore faces a lower risk of direct tariffs from President Trump, given that the US consistently exports more than it imports from Singapore - with the singular exception being the pandemic year of 2020.
Furthermore, Singapore is the only Southeast Asian economy with a bilateral free trade agreement with the US - a deal that has been in place since 2004. This should offer some protection from tariff risks.
However, the country will still be impacted by the tariffs’ negative shocks to the global trade environment, given its extensive reliance on trade as a small and open economy.
We calculate that a 1 per cent fall in Singapore’s total trade could lead to a 0.25 per cent decline in real GDP growth.
Taking history as a guide, the previous US-China trade war led to slower trade growth in 2018 for Singapore, and merchandise trade eventually contracted 3.2 per cent in 2019.
The entire economy managed to eke out 0.7 per cent in real growth in 2019, down from 3.4 per cent in 2018.
The government forecasts growth to slow to 1 to 3 per cent this year, down from 4.4 per cent in 2024.
Slowing growth could have a knock-on effect on employment. Advance labour market estimates show that Singapore’s overall unemployment rate was still low at 2 per cent in 2024, similar to 1.9 per cent in 2023.
However, if growth declines, unemployment and retrenchments could inch up. Certain segments would be more heavily impacted, such as young workers without relevant job experiences.
For instance, the 2024 Joint Autonomous Universities Graduate Employment Survey shows that 87.1 per cent of fresh graduates were employed within six months, down from 89.6 per cent in 2023. About 79.5 per cent found a full-time job, from 84.1 per cent the year before.
POLICIES TO BOOST GROWTH
The Singapore government is stepping in to support the economy.
In its January 2025 monetary policy statement, the Monetary Authority of Singapore (MAS) said that it will “reduce slightly” the slope of its policy band with no changes to its width and the level at which it is centred.
This slight policy easing will help the economy, especially the trade-dependent sectors. In fact, we expect that further reductions to the slope settings could be on the cards at the July or October monetary policy announcements, should core inflation momentum decelerate further or should growth surprise on the downside.
In terms of fiscal policy, Budget 2025 aims to help Singaporeans through an uncertain year while boosting the economy at the same time. Measures such as the new tranche of CDC vouchers, SG60 vouchers, higher U-Save rebates and personal income tax rebate were sizeable in totality.The Budget provides support to businesses in managing high costs. Spending on infrastructure - including for Changi Airport, clean energy, and coastal protection - will also provide opportunities for businesses to participate as these projects come onstream.
With the ongoing tariff wars, it is almost guaranteed that Singaporeans face a choppy year ahead. Even though growth will likely slow down, the bright side is that the country still possesses a strong arsenal of policy tools that can tide it through.
Jester Koh is Associate Economist at UOB.
