The government does not expect Singapore to dip into a recession next year but slowdown risks abound, and the country’s economy will increasingly become “two-sided” because of the different exposures to various economic sectors.
On Nov 23, the government projected that Singapore’s gross domestic product (GDP) will grow by 0.5% and 2.5% next year, down from about 3.5% this year, as the slowing global economy weighs on the growth of outward-oriented sectors in the country.
Selina Ling, OCBC Bank’s chief economist, says that although the Ministry of Trade and Industry maintains that a 2023 recession is not its “baseline scenario”, the official growth forecast implies a further slowdown from this year.
“The external economic and geopolitical headwinds are already brewing, with sharp slowdowns if not outright recession worries in the major economies like the US and Eurozone, coupled with the lingering Russia-Ukraine war and its global supply chain disruptions, aggressive global monetary policy tightening amid elevated inflation, decline in global semiconductor demand (exacerbated by the US-China tensions), and China’s ongoing struggle with Covid and weak property market,” says Ling.
OCBC’s forecast is for 1% to 3% growth for 2023, based on the assumptions that major central banks will pause on their rate hikes in 1H2023 as inflationary pressures start to ease amid the slowdown. OCBC is also betting that China will further relax its zero-Covid policy and shore up its property market through more proactive policy support which could provide some support to the regional economies.
“If there is a further escalation of these headwinds, then an outright sequential dip in the quarterly growth momentum cannot be ruled out. However, this may not be a game-changer to deter major central banks from persisting with their hawkish monetary policy until inflation shows convincing signs of returning to Earth,” adds Ling.
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Meanwhile, Maybank’s economists Chua Hak Bin and Lee Ju Ye have maintained their 2023 GDP growth forecast at 1.5%, which is at the mid-point of MTI’s 0.5% to 2.5% forecast range.
Even so, they’ve raised the probability of a recession over the next 12 months to 12% as of this month. In October, this number was 3 percentage points lower at 9%. The increased probability is due to aggressive global monetary tightening and slowing external demand, although they remain hopeful that any recession will likely be shallow due to the offsetting reopening tailwinds.
MAS to tighten further?
Now, despite rising recessionary risks, some economists expect the Monetary Authority of Singapore (MAS) to tighten its monetary policy again at the next scheduled review on April 2023.
OCBC’s Ling warns that headline and core consumer price inflation (CPI) may not peak and subside until 2H2023, despite some policy confidence that price pressures will not become entrenched and the inflation momentum will slow.
Barclays’ senior regional economist Brian Tan, on the other hand, expects MAS to refrain from further tightening in 2023, although such moves can’t be ruled out. “The MAS’s quarterly inflation projections are broadly in line with ours, at least up to 1H2023, suggesting less scope for further overshoots — though clearly the risk is that our own forecasts are too conservative, leaving the door open to more adjustments,” he says.
“While we expect the MAS to remain focused on inflation, we also note the risk that stronger-than-expected GDP growth — as implied by our forecasts — or an insufficient easing of tight labour market conditions prove significant enough to convince policymakers that another round of tightening is warranted,” adds Tan. He is forecasting Singapore’s GDP growth for 2022 and 2023 at 3.8% and 2.3% respectively, which he notes is relatively high compared to MTI’s forecasted growth rate.
RHB Singapore’s senior economist Barnabas Gan has also forecasted higher-than-official growth rates of 3.7% and 3.0% for 2022 and 2023. He projects growth momentum to slow further in 1H2023. “Although not our base case, the balance of risks is tilted towards a technical recession in 2023,” he notes.
For UOB’s senior economist Alvin Liew, the slowing growth momentum in 2023 is going to be even more severe. He expects Singapore to see a “significant moderation” to 0.7% GDP growth next year with advanced economies expected to enter into recession. “Our 2023 outlook is also largely premised on the broad moderation in external economies next year, and we project the US and European economies — which are key end markets for Singapore — to enter into a recession in the next six to twelve months amidst aggressive monetary policy tightening stance among these advanced economies,” Liew explains.
This will directly impact the manufacturing and external-oriented services sectors. “Specifically, we now expect the manufacturing sector to contract by 5.4% next year — from 2.8% growth projected for 2022— due to the faltering outlook for electronics and weaker external demand,” says Liew.
Nonetheless, there are silver linings, identified by OCBC’s Ling to include the recovery in domestic and tourism demand within Asean including Singapore.
Maybank’s Chua and Lee expect a “two-sided economy” to become more stark in 2023. Some of the reopening sectors, like hospitality, aviation, F&B and construction, will expand at a healthy pace even as manufacturing and external-oriented sectors, such as wholesale trade, water transport, and finance and insurance contract, they predict.
