Look Ahead 2023: Young Singaporeans need to act fast to minimise impact as inflation persists and growth slows in new year, say experts

TODAY's four-part Look Ahead series examines some hot-button issues that could affect Singaporeans in 2023. In this first instalment, we look at what the current climate of high inflation and slow economic growth means for young professionals here.

SINGAPORE — The current climate of persistent inflation and dampened economic growth looks set to continue in 2023, and young professionals in Singapore unused to such scenarios will have to take steps to safeguard their future, experts say.

TODAY spoke to economists and financial experts about how global and domestic developments will affect youths’ spending power.

They stressed the importance of prudence and building up a safety net, particularly in the face of job uncertainty in a slowing market.

They also noted the benefits of investment to mitigate against the erosive effect of inflation.

"Older folks", added CIMB Private Banking economist Song Seng Wun, "have had experience with higher cost of living and higher interest rates on daily life".

“But the younger ones, especially those who have just started working… the spike in costs of borrowing, the higher cost of living, I think is where they will have to adjust themselves to.”

GROWTH OUTLOOK FOR 2023

Global economy

Though their precise projections differ, economists broadly agreed that the world economy will grow at a slower rate in 2023 than last year.

Maybank, in its Asean Macro 2023 Year Ahead Report, projected global gross domestic product (GDP) growth to slow down to 1.7 per cent in 2023, from 2.9 per cent in 2022.

Meanwhile, Standard Chartered in its Economic Outlook 2023 report forecast global growth this year to come in at 2.5 per cent, also lower than the 3.4 per cent it expected in 2022.

Standard Chartered's report describes 2023 as “a year of two halves”, as analysts expect the United States and Europe to slip into “relatively shallow recessions” in the first six months and recover in the latter part of the year.

Maybank economists, too, foresee a mild global recession “largely due to advanced, not emerging, economies”.

Its senior economist Chua Hak Bin wrote in the bank's report that the "probability of a US recession over the next 12 months is high at 40 per cent".

In Singapore

The Ministry of Trade and Industry (MTI) gave forecasts in November 2022 that Singapore’s GDP growth would come in at “around 3.5 per cent” in 2022 and “0.5 to 2.5 per cent” in 2023.

Separately, the Monetary Authority of Singapore’s (MAS) latest quarterly survey published in mid-December saw private sector economists lowering their growth estimates for the Republic's GDP to 1.8 per cent, down from their previous forecast of 2.8 per cent in September.

OCBC's head of research and strategy Selena Ling noted a quarter-on-quarter contraction in the manufacturing sector in the third quarter of last year while the growth in the services industry had picked up speed. The former industry "will be a laggard going ahead", she added.

“The weaker external economic environment will increasingly weigh on the outward-oriented sectors in Singapore,” said Ms Ling.

Meanwhile, consumer-facing sectors and other travel-related industries are set to benefit from the recovery in air travel and international visitor arrivals, a view shared by a few other economists.

On the other hand, DBS’ team of economists said that the “existing manpower crunch would put a lid on the near-term prospects” of the services cluster, notwithstanding its recent strong performance.

The pressure on wage growth due to the tight labour market might also rein in the surge in discretionary spending, in turn weakening domestic consumption demand.

“In short, while we expect growth in the overall services cluster to hold up in the coming two quarters, some signs of weakness could emerge by mid-2023,” said DBS.

INFLATION PROJECTIONS

Global economy

Inflation, meanwhile, will start falling next year, albeit likely being "sticky downwards because of tight labour markets and remain well above central bank targets", said Dr Chua, meaning that it would go down at a slower than desired rate.

Agreeing, Mr Song from CIMB said that prices are expected to remain largely elevated.

“Prices are still rising (but) at a slower pace now. So year on year, it (inflation) should be lower. But it's not at the 1 or 2 per cent levels, or less, that we’re used to before the Ukraine-Russia war,” said Mr Song.

OCBC’s Global Outlook report for the first half of 2023 estimates the global inflation rate for the whole of 2022 to come in at 8.8 per cent, and for 2023 to be at 6.5 per cent.

These compare to the 4.7 per cent inflation experienced in 2021.

Underlying these forecasts are factors such as the ongoing Ukraine-Russia war — which has disrupted supplies and sent commodities and energy prices soaring, China’s economy, and US-China relations, said economists.

In Singapore

Economists largely foresee high inflation to persist locally despite having peaked in September 2022, largely due to the one percentage point hike in the Goods and Services Tax (GST) to 8 per cent in January.

Standard Chartered, in forecasting headline and core inflation in 2023 at 5.0 per cent and 4.4 per cent respectively, added that “our forecasts would be lower" if not for the hike.

Meanwhile, Ms Ling of OCBC expect that headline and core inflation may "remain sticky" at around 6 per cent and 4 per cent year-on-year respectively, citing "domestic drivers" such as the GST, public transport fare hikes and the tight labour market.

Economists also expect housing costs to remain firm.

Maybank analysts Dr Chua and Ms Lee Ju Ye also cited the expansion of the Progressive Wage Model to larger sectors come March to further add to inflationary pressures.

“A US or global recession, if it materialises, will be deflationary and accelerate the fall in inflation,” they added.

Economists do not rule out the possibility of Singapore heading into recession.

“Recession risks are rising, but any recession will likely be shallow because of offsetting support from reopening sectors, including hospitality, aviation, food & beverage, retail and construction,” said Dr Chua and Ms Lee of Maybank.

DBS’ economist team expects “growth momentum to slow further in the coming quarters, and a technical recession within the next three quarters should not be discounted”, as stated in their Singapore Outlook 2023 report.

Meanwhile, Ms Ling of OCBC said that recession “is not the baseline scenario for 2023 as yet”, however, Singapore “may not be able to avoid” one if major economies experience a protracted or sharp slump.

SHOULD YOUTH INVEST OR SAVE?

‘Nine months’ of monthly average expenses’

Dr Chua of Maybank noted that “the younger population may not have experienced a recession, high mortgage rates and such painfully high inflation in their short working lives”.

“They will have to learn to adjust their lifestyles and spending in the face of a more volatile and uncertain environment,” he added.

DBS senior economist Irvin Seah said the slowing economic growth could have adverse implications on the labour market.

Mr Timothy Ho, co-founder and managing editor of investing website Dollars and Sense, cited possibilities of job losses, further noting that it is “no longer true” that retrenchments mainly affect older workers, as many young workers aged 35 are getting retrenched, too.

“For those of us with a job, we may not enjoy the usual increment that will allow us to naturally keep pace with inflation,” he added.

This underlines the need for the younger generation to build a safety net for themselves in preparation for the uncertainties ahead, said financial experts.

Ms Daphne Lye, who heads the solutions team at financial advisory platform MoneyOwl, said: “Fundamentally, we should build up our emergency funds to about six months of our expenses in case of unexpected events such as a job loss or to meet unforeseen expenses.”

Mr Ho recommended a larger rainy day stash worth “at least six to nine months of monthly average expenses”.

Merely saving, keeping money ‘no longer work’

National University of Singapore business professor Lawrence Loh, however, noted that with the escalated inflation, “traditional bastions of financial security like savings have become less attractive”.

The younger generation, particularly those not supporting dependents, may afford to be more adventurous and eye risky assets, he added.

Ms Dawn Cher, author of financial blog SG Budget Babe, said that inflation would erode the value of one’s cash, hence “saving money and keeping it in our bank account will no longer work”.

“This is the time to be smart and proactive about moving our liquid savings between and around different fixed income instruments, be it fixed deposits, treasury bills or even the Singapore Savings Bonds,” she said.

Ms Lye added that such a move would enable one to get good returns in the current high interest rate environment.

The financial experts also advised looking into investments as a means to generate returns that outpace inflation.

Ms Cher suggested “(looking) out for bargains in the stock market”.

“It is ironic that for the last two years, people kept wishing for a market crash so that they can buy stocks cheaper, but now that the crash is here, everyone is freaking out and is too scared to invest,” she said.

However, she added that the choice of where to invest depends on the time and resources each individual is able to dedicate to manage their investments.

In view of the economic uncertainties, Mr Ho cautioned: “It would also be prudent to take a longer term approach towards investing rather than to invest everything that we have with the expectation that the markets will recover.”