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GDP growth momentum 'likely' to moderate below 2% y-o-y handle in 1Q2023: analysts

Felicia Tan
Felicia Tan • 11 min read
GDP growth momentum 'likely' to moderate below 2% y-o-y handle in 1Q2023: analysts
Analysts are expecting Singapore’s GDP growth momentum in 2023 to moderate even after the country’s flash estimates for the full year in 2022 stood within the official growth forecast of 3% to 4%. Photo: Bloomberg
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Analysts are expecting Singapore’s GDP growth momentum in 2023 to moderate even after the country’s flash estimates for the full year in 2022 stood within the official growth forecast of 3% to 4%.

On Jan 3, the Ministry of Trade & Industry (MTI) announced that Singapore’s GDP grew by 2.2% on a y-o-y basis in the 4Q2022 and by 3.8% for the full year in 2022.

The flash estimates for Singapore’s GDP in the last quarter came ahead of Bloomberg’s estimate of 2.1% y-o-y.

OCBC keeps 2023 GDP estimate unchanged at 2.0%

For Selena Ling, chief economist and head of treasury research and strategy at Oversea-Chinese Banking Corporation (OCBC), the 4Q2022 GDP flash estimates came in better than expected, which propelled the full year GDP flash estimates to come in close to her forecast of 3.5%.

That said, the manufacturing sector notably contracted by 3.0% in the 4Q2022, making this the first contraction since the 4Q2020, and worse than Ling’s forecast of -2.5%.

See also: Singapore's GDP grew by 3.8% in 2022: MTI's flash estimates

However, the lower-than-expected performance from the manufacturing sector was offset by the better-than-expected services growth, which stood at 4.1% y-o-y. Construction also clocked in a healthy 10.4% y-o-y in the 4Q2022, Ling notes.

With the manufacturing sector continuing to remain lacklustre in the near-term, Ling is expecting 2023’s growth momentum to moderate below the 2% y-o-y handle in the 1Q2023. The momentum for the manufacturing sector has been faltering in recent months on the back of the growing global growth concerns and with the global electronics industry losing steam, Ling points out.

To this end, her growth forecast for the full year in 2023 remains at 2% y-o-y with “immediate growth/recession downside risks for the major economies partially offset by the China’s earlier-than-expected Covid policy pivot story”.

See also: Another possible delisting hastens calls for SGX revival

“Although the International Monetary Fund (IMF) continues to sound a cautious note on the possibility of a third of the global economies experiencing a recession this year, nevertheless domestic firms and consumers will still have to grapple with elevated inflation and cost pressures. That said, the local job market is likely to soften slightly but remain generally supported,” Ling writes.

“Manufacturing is traditionally not the key driver of local employment, so a further tapering of manufacturing growth momentum per se should not move the needle that much,” she adds.

Upside factors to Singapore’s GDP would be the country’s services sector and China’s earlier Covid pivot policy.

“For the information and communications technology (ICT) and finance insurance industries, hiring and wage expectations which had benefited significantly last year should start to taper in line with softening growth momentum,” Ling continues.

On the upcoming Budget announcement on Feb 14, Ling says a “mildly supportive fiscal stance” is likely to take place.

“With [the] Singapore dollar nominal effective exchange rate (S$NEER) still trading on the stronger side of its parity band (+1.3%), the key to watch will still be the consumer price index (CPI), especially core CPI, readings in the run-up to the April monetary policy statements (MPS),” she says.

RHB retains 2023 GDP growth forecast at 3.0%

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RHB Group Research’s senior economist Barnabas Gan is retaining his GDP growth forecast at 3.0% for 2023.

Gan’s estimate comes against the government’s official range of between 0.5% to 2.5% for the year ahead.

In his report dated Jan 3, the economist says he expects Singapore’s growth momentum to decelerate into the 1H2023 before stabilizing in the second half of the year. He adds that he sees three key drivers for the slowdown, namely the decline in global trade demand, which is expected to persist over the next three to six months.

The decline may subsequently drag manufacturing activities, especially in electronics and chemicals, and tighter US monetary policy, Gan continues.

“For that matter, we forecast the peak Federal Funds rate (FFR) at 5.0% – 5.25% in 1Q2023, with the balance of risks tilted to the upside,” he writes. “In addition, we remain cautious about China, and its status as the world’s largest semiconductor chops and petrochemicals importer could weigh on Singapore’s trade dynamics.”

To this end, Gan notes that RHB’s proprietary GDP index suggests that Singapore will see a slowdown to trend (not a recession though) in the 1Q2023.

“Our model, which takes on an R-square of 0.812 and six leading indicators, indicates that Singapore’s GDP momentum will decline further in 1Q2023,” he says. “As discussed above, the decline will likely be led by the decline in exports and manufacturing momentum, even as tighter US monetary policy continues to dissuade consumer and investor confidence.”

He adds: “Although not our base case, the balance of risks is tilted towards a technical recession in 2023. Even if a technical recession (defined as two consecutive quarters of negative q-o-q growth) is seen in 1H2023, we think it will likely be short, shallow, and orderly.”

That said, Gan sees a bright side coming from Singapore’s sustained recovery in its services sector in 2023. This comes on the back of a recovery in the country’s tourism arrivals and a further recovery in air travel and international visitor arrivals. To this end, the reopening of China’s borders will be a boon to Singapore’s services sector given that China was Singapore’s largest source of inbound tourism from 2017 to 2019.

“The caveat to our cautiously-optimistic outlook is predicated on the uncertainties surrounding global geopolitical tensions and pandemic-related risks. Any worsening of these risks may re-elevate supply chain congestions and reintroduce sticky inflation,” says Gan.

“According to the World Health Organisation, new Covid-19 variants may arise from the ongoing surge in infections across China, coupled with the lack of clarity over the ongoing Russia-Ukraine tensions,” he adds. “The consolation, perhaps, is that our proprietary indicators suggest that US supply chain congestions returned to relatively normal levels in November 2022, and we expect the normalisation process to continue in 2023.”

Maybank, too, keeps 2023 GDP forecast at 1.5% amid mounting global headwinds

Maybank Securities analysts Chua Hak Bin and Lee Ju Ye are also keeping their GDP forecast for 2023 at 1.5%. Their forecast factors in the mounting global headwinds that will dominate over the dissipating headwinds from the global reopening.

“Growth will be uneven with manufacturing in recession, while services will continue to expand with the reopening and recovery in the hospitality, aviation, and consumer-facing sectors. Our GDP forecast is at the midpoint of MTI’s forecast range of 0.5% to 2.5%,” they write.

They add that the manufacturing sector, which saw its first decline since the 2Q2020, is expected to contract in the 1H2023 as a slowing global economy dampens demand especially for consumer devices such as smartphones and computers.

Even though China’s reopening may help to cushion the weakening external demands in the US and Europe and lift visitor arrivals, concerns over new Covid-19 variants may cap any upside risks, the analysts note.

On the local front, Chua and Lee note that a “tight labour market and rising wages will support a ‘half full’ economy.”

“The Manpower for Strategic Economic Priorities (M-SEP) scheme was launched on Dec 13, 2022, which will allow qualifying firms to raise foreign worker quota temporarily (up to 5% of their base workforce headcount for S Pass and work permits) if they contribute to the country’s economic priorities or commit to hiring or training resident workers,” they add.

In addition, the $8 billion GST assurance package will support private consumption in Singapore following the GST hike to 8% from 7% on Jan 1, 2023.

At the Monetary Authority of Singapore’s (MAS) policy meeting in April, the analysts expect the central bank to tighten again via another re-centring.

“Our model suggests that the S$NEER is at about +1.3% above the mid-point. Core inflation remained elevated at +5.1% in November (similar to October) due to the faster pickup in costs of food and retail & other goods,” Chua and Lee note.

“Inflation will likely be sticky and fall slowly in 2023 (Maybank forecast: headline CPI at 6%, core CPI at 4%) because of a tight labour market, housing shortage, a 1% GST hike, and expansion of the Progressive Wage Model to larger sectors, including food services, waste management and occupational (administrators, drivers) on March 1,” they add.

UOB keeps ‘modest’ GDP growth forecast at 0.7% for 2023

UOB’s senior economist Alvin Liew is also keeping his “modest” GDP growth forecast for the year 2023 at 0.7%. Liew’s forecast, which is closer to the lower end of the official range of 0.5% to 2.5%, comes on the back of the faltering manufacturing outlook. It doesn’t include other events such as an escalating war in Europe and the possibility of new Covid-19 variants.

That said, Liew notes that there are upside growth factors that could be attributed to the continued recovery in leisure and business air travel and inbound tourism. The impact of China’s re-opening from Jan 8 is also likely to be positive for these sectors although it is “difficult to quantify at this juncture”.

“Our 2023 outlook is largely premised on broad moderation in external economies this year, and we project the US and European economies (which are key end markets for Singapore) to enter a recession this year amidst aggressive monetary policy tightening stance among these advanced economies,” he writes.

“This will directly impact the manufacturing and external-oriented services sectors,” he adds. On this, Liew expects the manufacturing sector to contract by 5.4% in 2023, down from the 2.6% growth seen in 2022.

Ahead of MAS’s meeting, Liew believes there is still room for a further tightening of the central bank’s policy in 2023. This is especially if Singapore’s core inflation shows no signs of moderation, staying above 5% in the coming months. Off-cycles may also be a possibility, especially in early 2023, he adds.

100 bps off-cycle upward re-centring may happen: Citi Research

Citi Research analyst Kit Wei Zheng sees reduced downside risks to his 2023 GDP forecast of 1.8% after advanced estimates for Singapore’s GDP for the 4Q2022 came in “more resilient” than expected and alongside tailwinds from China’s earlier reopening.

“But given the relative size of final demand exposures, the cushion from China’s reopening is still unlikely to fully offset drags from expected recessions in Europe (in 1H2023) and US (in 2H2023),” he writes.

“In particular, semiconductor de-stocking pressures could persist at least into 1H2023 given the implied inventory build-up in recent months, such that a shallow electronics manufacturing led technical recession cannot be ruled out in 1H2-23 (which would lead to 2023 growth falling below 1.5%),” he adds.

“Even so, a tech manufacturing led recession is unlikely to result in large scale job losses and/or a significant easing of labour cost pressures in our view,” Kit continues.

Despite the recent fall in the Singapore overnight rate average (SORA), Kit’s expectation of a terminal Fed Funds rate of 5.25%-5.5% should maintain upward pressure on short term interest rates.

“This may erode home affordability, but with employment not expected to fall, the burden of higher debt servicing costs will likely be borne more by consumer spending than home prices,” he says.

“With headline inflation likely to still outpace nominal wage growth in 2023, the implied fall in real wages might weigh on consumer spending of residents, though this could be tempered if real wage declines are concentrated on higher income groups with lower marginal propensity to consume, or if an influx of tourists supports demand in consumer facing sectors,” he adds.

Further to his report, Kit now sees Singapore’s core inflation averaging around 5.1% in the 4Q2022 and at 5.6% in the 1Q2023, close to MAS’s end-October forecasts of 5.2% in the 4Q2022 and 5.5% in the 1Q2023.

He also sees odds continuing to slightly favour an off-cycle upward re-centring of around 100 basis points (bps) in late January, possibly after the release of December’s CPI data. This is as Citi’s and MAS’s “anticipated step up in core [inflation] in 1Q2023” remaining higher than MAS’s earlier forecasts in its October MPS of 'around 5% into early 2023’ and with “recent developments indicating reducing downside risks on growth”.

To Kit, the risks of a delayed tightening or a pause would materialise if core inflation in the 4Q2022 comes broadly in line with expectations, or if the recently lower oil prices are deemed sufficient to reduce the urgency of an off-cycle move.

“We note that historically, off cycle moves were preceded by upside surprises of at least 40-50 bps in the preceding quarter,” says Kit.

He adds: “The GST induced step up in 1Q2023 core had already been incorporated in the 200 bps upward re-centring on Oct 14, 2022, and lagged impact of earlier cumulative tightening moves are deemed sufficiently restrictive, especially with growth expected to slow and the current mildly positive output gap expected to reverse.”

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