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Singapore faces uneven recovery in 2023 with impact of China’s reopening still uncertain

Bryan Wu
Bryan Wu • 7 min read
Singapore faces uneven recovery in 2023 with impact of China’s reopening still uncertain
Singapore’s 4Q2022 growth was 2.1% on a y-o-y basis, a slight downward revision from the MTI's advance estimate of 2.2% and easing from the 4% expansion in 3Q2022.
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Economists have weighed in on Singapore’s growth prospects in 2023 after the Ministry of Trade and Industry (MTI) maintained its growth forecast at 0.5% to 2.5% for this year.

On Feb 13, the MTI reported Singapore’s 4Q2022 growth of 2.1% on a y-o-y basis and 0.1% on a q-o-q seasonally-adjusted basis — a slight downward revision from the ministry’s advance estimate of 2.2% and easing from the 4% expansion in 3Q2022.

According to OCBC Bank chief economist Selena Ling, this was an “unexpected” revision which brought Singapore’s full year gross domestic product (GDP) growth from the MTI’s flash estimates of 3.8% to 3.6% — a sharp slowdown from the revised 8.9% growth posted in 2021.

“Singapore’s 2023 growth prospects have not fundamentally shifted as global dark clouds still loom. There was no change to the official 2023 growth forecast of 0.5% to 2.5% y-o-y, with MTI citing that while the external demand outlook has improved slightly, other global uncertainties remain including weakness in the major economies of the US and Eurozone, as well as tighter financial conditions and ongoing geopolitical tensions,” she says.

Ling notes that China’s reopening bodes well for regional growth momentum if Chinese consumer demand for goods and services picks up in coming months. However, this may not be enough to offset the slowing demand story in other major economies like the US, Eurozone and the UK.

“Moreover, the current semiconductor bout of weakness may last until 2H2023 and prove a dead weight on electronics and manufacturing growth prospects at this juncture,” she adds.

See also: Singapore’s NODX declined by 8.7% in June; drop mainly due to non-electronics

Ling says that the recent spate of alleged spy balloons has cast a darker shadow on US-China tensions, with the US Department of Commerce adding more Chinese firms to its entity list, while the ongoing war in Ukraine means the geopolitical outlook remains volatile for this year.

Her forecast remains “slightly under” the 2% handle, with 1Q2023 growth likely to decelerate further amid the continued soft patch in manufacturing and electronics.

Two-speed economy

See also: One-year-ahead headline inflation expectations down to 3.8% in June: SInDEx

Ling is expecting the services sector will continue to do the “heavy lifting” in 2023, after having contributed 3.2% points to real GDP growth last year.

According to her, 1H2023 is likely to see a “choppy” growth trajectory. “While some domestic-oriented service sectors will lead, namely air transport, accommodation & arts, entertainment and recreation, others like the manufacturing (especially electronics and particularly semiconductor and precision engineering) and outwardly-oriented sectors like wholesale trade, water transport and the finance and insurance sectors may underperform in the near term,” she explains.

JP Morgan’s Asean chief economist Ong Sin Beng says that Singapore’s growth in the last quarter of 2022 underscores “sectoral bifurcation”, with further variation lying ahead. “The 4Q2022 GDP data depicts a two-speed economy, with the goods sector slowing markedly, contracting 8.2% q-o-q, while the services sector is recovering rapidly, up 6.6% q-o-q, especially in travel-related services which expanded 9.1% q-o-q,” he says.

“One of the features of the 2023 forecast for Singapore is the ongoing bifurcated recovery between goods and services sectors. And even within the services producing sectors, significant variations in performance, led by travel-related services,” Ong explains.

He expects this bifurcated recovery has also been evident in the sectoral dynamics of consumer price index (CPI). “Although December’s core CPI report continues to stabilise, the sub-indices mirror the variations in the cyclical posture, with travel-related costs turning lower following elevated readings over the course of 2H2022.”

“Subsequently, we expect that the overall inflation trajectory should ease in sequential terms in 1Q2023 following the 1 percentage point GST hike on Jan 1 and should keep the Monetary Authority of Singapore (MAS) on hold through 2023,” says Ong.

Citi Investment Research’s Kit Wei Zheng and Jester Koh see things differently — their expected sharper rise in 1Q2023 core inflation compared to MAS’s mid-October forecast of “around 5%”, along with a slightly better outlook is supportive of a final tightening in April.

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“Our base case remains a 100 basis points (bps) upward re-centring for now, but MTI’s less cautious outlook keeps alive the possibility of gentler fall in core and thus ‘slightly’ steeper slope,” they say.

According to the Citi analysts, MTI’s 0.5% to 2.5% forecast range for 2023 implies an average q-o-q growth of 0% to 0.8% in 2023. Notwithstanding the mechanical drag from the downward revision in 4Q2022 GDP, they believe the “slightly less adverse external” backdrop of China’s reopening has on balance reduced the downside risks to their 1.8% GDP growth forecast for 2023, which assumes an average sequential growth of 0.7% that is close to trend.

Maybank Securities analysts Chua Hak Bin and Lee Ju Ye​ say that despite the slower growth, they also expect the MAS to tighten monetary policy again in April 2023 with another re-centering to reduce intense core inflation pressures amid a tight labour market.

Chua and Lee believe that Singapore will dodge recession in 2023 despite facing uneven growth ahead, with manufacturing and trade-related services in recession. They see construction and services continuing to expand with the reopening and recovery in the hospitality, aviation and consumer-facing sectors.

They have maintained their 2023 GDP forecast at 1.7% growth, slightly above the midpoint of MTI’s 0.5% to 2.5% forecast range, and expect Feb 14’s Budget 2023 announcement to provide social support measures.

“We are expecting a ‘half-full’, rather than a ‘half-empty’ economy, as China’s reopening will cushion the impact from the slowdown in the US and European Union (EU). The inverted US yield curve is pointing to a high 30% probability of recession in Singapore, but we think China’s reopening will reduce the odds of a recession and ‘decouple’ the overall economy from the manufacturing downturn,” say the analysts.

They expect the Budget 2023 announcement to include support measures for low-income households and businesses amid the growth slowdown and elevated inflation. They also see the GST Assurance Package topped up by $1.4 billion and social support likely to be expanded in the form of temporary cash support and training subsidies. Measures such as small business recovery grants, temporary bridging loans and trade loans may be extended for businesses, they say.

China spillover remains to be seen

Meanwhile, RHB Group senior economist Barnabas Gan has kept his 2023 GDP growth forecast at 3.0%, and expects growth momentum to decelerate into 1H2023 before picking up in 2H2023.

Gan says the expected growth momentum slowdown in 1H2023 can be attributed to higher interest rates and slower trade and manufacturing activities.

According to Jamus Lim, associate professor of economics at ESSEC Business School, Asia-Pacific, this slowdown is largely a reflection of deteriorating external conditions. In 4Q2022, growth in merchandise trade went negative, even as services trade slowed significantly to single digits, having expanded by double digits over prior quarters, he notes.

“This, in turn, has been due to a slowdown in growth in the major G3 economies (the US, Euro Area, and Japan), which have fallen over the past few quarters. Continued tightening in monetary conditions — even though the pace is slowing — will likely remain a headwind for these economies’ growth in the first half of 2023, and that will in turn have implications for Singapore’s external demand,” says Lim.

Nonetheless, he points out that China’s relatively aggressive reopening could be a “saving grace”; Beijing is unlikely to backtrack on its new position, which will mean a rebound in China’s economy, says Lim.

Whether this translates into anything “substantive” for Singapore remains unclear, he notes. “While our tourism sector will very likely benefit from new Chinese tourist inflows in the coming quarters, the Middle Kingdom’s strategy of dual circulation, which seeks to refocus much of its demand domestically,” he says.

“Add to this the relatively small contribution of tourism to Singapore’s economy (the sector is around 4% of GDP), It is therefore unclear whether this boost will be sufficient to offset the drag from slowdowns in the advanced economies,” adds Lim.

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