Singapore faces slower growth ahead, as the Ministry of Trade and Industry (MTI) warned that 2022 GDP growth will come in at the lower half of the 3%-5% forecast range.
Warning of “emerging downside risk”, DBS Group Research senior economist Irvin Seah places the full-year growth figure at 3.5%.
“Final GDP figures for the first quarter announced today saw economic growth momentum easing amid increasing external headwinds,” writes Seah in a May 25 note.
The headline GDP growth number of 3.7% y-o-y came in line with DBS’ expectation of 3.6%, though it was down from 6.1% in the previous quarter. On the margin, growth momentum has eased to 0.7% q-o-q from 2.3% previously.
“More importantly, growth momentum in the key manufacturing sector has dipped marginally into the red at -0.2%, the first decline after four consecutive quarters of expansion. Though this is likely part and parcel of the normalisation process, downside risk is emerging, which could take further toll on this key engine of recovery,” says Seah.
China is the key factor which could pose a drag on the manufacturing sector in the next one to two quarters, says Seah. “Amid spikes in domestic infections, the resulting lockdowns in key cities amid its zero-Covid-19 policy, domestic demand from within China has softened while supply chains in the region have been severely disrupted.”
See also: Singapore's economic growth to hit 3% to 5% in 2022; inflation still a pressing concern
He adds: “This will have profound implications on the prospects of Singapore’s manufacturing sector, which thus far has been the main engine of the recovery. The second quarter GDP growth may show a q-o-q (seasonally adjusted) decline as a result. ”
That said, recovery will become more broad-based on the services sector, says Seah. “The re-opening of the borders and easing of measures will ensure the ‘quality’ of growth will improve in the coming quarters. Barring the risks of Covid-19 resurgence or further mutation of the virus, global travel will steadily pick up. This would prompt a speedier recovery in the hospitality, F&B, aviation and tourism related services industries.”
The number of tourist arrivals and the F&B index are showing early signs of improvement. This will likely be one of the key silver linings in the coming months.
According to Seah, externally oriented services such as shipping, wholesale trade and financial services will continue to do well. “IT services will benefit from the increased investment in digital solutions and further adoption of new technologies, while business services will continue to leverage on the overall improvement in business sentiments, as well as a still resilient real estate activity.”
Meanwhile, the labour crunch remains the biggest challenge for the construction sector. “The continued moderation in growth momentum is a reflection of the manpower crunch within this sector even though the project pipeline remains strong,” says Seah.
As of 4Q2021, there is an unprecedented job vacancy of 12,400 in the industry. “Indeed, the sector is still far from a full recovery from the pandemic, as the value-added of the sector is still below pre-Covid-19 level. The reopening of the borders should help but such a manpower bottleneck will take time to resolve.”
Rising external risks
Watch out for rising external risks, says UOB Global Economics & Markets Research economist Barnabas Gan, as he expects full-year GDP to average 3.5% as well.
In a May 25 note, Gan says Singapore’s overall economic prognosis remains optimistic on the back of trade and manufacturing momentum. “However, exogenous factors including rising inflation, China’s slowdown and the monetary policy tightening in advanced economies could weaken Singapore’s economic outlook in the year ahead.”
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Moreover, Singapore’s robust external trade since 2021 has been a key pillar in supporting overall economic growth, writes Gan. “Note that the non-oil domestic exports (NODX) expanded for its 17th straight month in April 2022 (up 6.4% y-o-y), led by broad expansions in both electronic (up 12.8% y-o-y) and non-electronic (up 4.6% y-o-y) shipments.”
He adds: “Shipment demand from Singapore’s key trading partners has also stayed buoyant in the latest data as NODX rose in seven out of 10 key export destinations.”
Exports to most of Singapore’s key destinations remained resilient, says Gan, suggesting that Asia remains “relatively insulated” from the geopolitical tensions surrounding Ukraine. “The favourable (albeit slowing) growth in NODX has also supported Singapore’s overall manufacturing sector, given the economy’s small and open stature.”
2.8% full-year forecast below MTI’s band
Maybank Securities analysts Chua Hak Bin and Lee Ju Ye maintain a much lower 2022 GDP forecast of 2.8%, below the lower bound of MTI’s forecast range.
“We think global headwinds will overwhelm and dampen the reopening tailwind. The Russia-Ukraine war, China’s rolling lockdowns, and global monetary tightening will likely douse the recovery and undercut growth by the second half of the year,” write Chua and Lee.
Higher inflation and interest rate increases may also squeeze consumer wallets and curtail spending, they add. “A stronger currency will hurt export competitiveness. Manufacturing will likely ease to a low single-digit pace in the remaining quarters, as chip production is operating near full capacity and on high base effects. Non-chip sectors will likely feel the brunt of the global slowdown.”
Meanwhile, laggard sectors like construction, aviation and hospitality sectors will improve with the easing of restrictions and reopening of borders.
However, the weight of these sectors are not as large as the manufacturing, and trade-related and interest rate-sensitive sectors. “Open borders and a stronger currency could also see Singaporeans spending more abroad and less at home.”
Chua and Lee expect the Monetary Authority of Singapore (MAS) to maintain the current tighter stance and steeper slope at the October meeting, following the “double” tightening move in April. That is unless inflation surprises on the upside.
“There is a risk that the MAS have to tighten further via a steeper appreciation bias, if inflation breaches and persists above the upper bound of the MAS forecast range in the lead-up to the October meeting. The S$NEER still has room to strengthen within the band and is currently trading at 1.2% above the midpoint, by our estimates,” they add.
Infographics: DBS Group Research, UOB Global Economics & Markets Research, Maybank Securities
