Singapore faces the “substantial risk” of entering a technical recession — defined as two consecutive quarters of negative growth — largely driven by weakness in manufacturing, according to UOB’s 3Q2023 quarterly global outlook, subtitled Searching for a Recession.
Although Singapore’s final 1Q2023 GDP was revised higher to an increase of 0.4% y-o-y from advance estimates of a y-o-y increase of 0.1%, this was still a quarterly contraction of 0.4% and visibly weaker compared to the y-o-y growth of 2.1% in 4Q2022.
Despite the upwards revision, growth in the first quarter of 2023 was still the weakest since 1Q2021, according to UOB, which adds that external developments continue to affirm its cautious growth outlook for Singapore this year.
The bank notes that Singapore’s manufacturing output has already contracted for seven months since October 2022 and that non-oil domestic exports (NODX) have contracted in yearly terms for eight consecutive months.
The Ministry of Trade and Industry (MTI) warned of a more prolonged and deeper electronics downturn in its outlook, maintaining its previous forecast for Singapore to grow by 0.5% to 2.5% in 2023 with growth likely to come in at “around the midpoint” of this range.
In comparison, UOB still expects Singapore’s full-year GDP growth to come in at 0.7% in 2023, on the lower end of the official forecast range, reflecting its more cautious external outlook and the impact on externally-facing sectors in the country.
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Singapore’s 1Q2023 growth was dragged by the manufacturing sector which posted declines of 4.8% q-o-q and 5.6% y-o-y, with all major segments within manufacturing aside from transport engineering recording declines.
On the other hand, the services sector supported growth with increases of 0.5% q-o-q and 2.0% y-o-y, as aviation- and tourism-related sectors outperformed while trade-related services declined.
As such, UOB still expects the manufacturing sector to contract by 5.4% in 2023, and now expects NODX to contract by 10% this year, down from previous forecast of a 5.5% contraction. “The export outlook remains dire, and more pronounced y-o-y NODX contractions for a few more months will be likely before improving in late 2023.”
Services could fare better in 2023 as upside factors could come from the continued recovery in leisure and business air travel and inbound tourism, which will benefit in-person services sectors, but the extent of services’ improvement may be curtailed by the risk factors of global growth weakness, banking sector issues and geopolitics will evolve, adds UOB.
Meanwhile, headline inflation rose 5.7% y-o-y in April, up from 5.5% in March, while core
inflation remained elevated but unchanged at 5.0% y-o-y. The Monetary Authority of Singapore (MAS) kept its inflation forecasts unchanged in its April report and said core inflation rate will remain “elevated in the next few months” but “on a broad moderating path” and “to slow more discernibly in the second half of the year”.
However, UOB says that MAS omitted to mention its previous projection of core inflation reaching around 2.5% y-o-y by end-2023. “We still expect headline inflation to average 5.0% and core inflation at 4.0% in 2023. Excluding the 2023 GST impact, we expect headline inflation to average 4.0% and core inflation to 3.0% in 2023, both still above the ‘standard’ 2% objective.”
UOB adds that should inflation stickiness persist, especially for core inflation, it will revise its forecasts upwards.
While inflation concerns remained in April, UOB says it was also evident the growth outlook has been also subjected to greater uncertainty and biased to the weaker side. As such, Singapore’s central bank is expected to keep to the status quo in its next Monetary Policy Statement scheduled for October.
“That said, it is also too soon to expect monetary policy to reverse course given the stickiness of core inflation,” adds UOB.
Were there to be an off-cycle announcement before the scheduled announcement in October, UOB believes it would likely be due to a sudden worsening in external conditions leading to a sharp growth downgrade. “MAS will likely shift to a more accommodative policy rather
than further tightening in its next move, but that is not our base case to expect an off-cycle policy announcement for now,” it explains.
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Tracing weakness in the Chinese yuan (CNY), the Singdollar (SGD) eased from 1.32 to 1.34 compared to the US dollar (USD) from mid-May to mid-Jun.
“While the SGD tracked the directional moves of CNY, we note that the beta is considerably lower, at less than 0.5, based on observations of previous periods of China uncertainties,” says UOB, adding that was likely due to the perceived status of the SGD as a regional “safe haven” currency.
The resilience of the SGD kept the S$NEER on the strong side of MAS’ policy band, at about 1% above the midpoint.
Overall, while UOB expects the SGD to remain “tethered” to the CNY in the near-term, its weakness against the USD will likely be “more measured”. Its updated USD/SGD forecasts are 1.36 in 3Q2023, 1.35 in 4Q2023, 1.33 in 1Q2024 and 1.31 in 2Q2024.
