Singapore’s growth to slow ‘below trend’ in 2023, dragged down by external-facing sectors: MAS

SINGAPORE’S economic growth is expected to slow to a pace that is “below trend” next year, weighed down by key external-facing sectors such as manufacturing and financial services, the Monetary Authority of Singapore (MAS) said in its half-yearly macroeconomic review on Thursday (Oct 27).

Meanwhile, the global economy is in a “precarious” state, with growth weakening even as inflation stays high, in a divergence that is expected to last “for at least several quarters”.

Singapore’s growth in recent quarters was underpinned by domestic-oriented and travel-related sectors that have benefited from the reopening of borders, helping to offset the underperformance in trade-related activities, said the report.

The report noted “signs of underlying weakness” in the manufacturing and financial sectors. Manufacturing shrank 3.2 per cent in the third quarter, with electronics output down 13.3 per cent during the same period.

The finance and insurance sector also weakened over the last two quarters, led by poorer outturns in the banks segment. Net fees and commissions continued to fall, weighed down by lower brokerage and investment banking revenues, while credit intermediation was lacklustre in Q3.

MAS kept its outlook for 2022 full-year gross domestic product (GDP) growth unchanged at 3 to 4 per cent, with broad-based contributions from the trade-related, domestic-oriented, travel-related and modern services clusters. This represents a rebalancing of growth drivers compared to 2021, when growth was predominantly led by trade, said MAS.

In 2023, however, growth is likely to be dragged by the trade-related cluster amid weaker external demand. The tightening of global financial conditions and some countries’ continued Covid-19 restrictions are likely to weigh on growth in Singapore’s major trading partners.

Economists broadly estimate “below-trend” growth to be under about 3 per cent. RHB has pencilled in 2023 growth at 3 per cent; OCBC, at 2.5 per cent; Maybank, at 1.5 per cent; and UOB, at 0.7 per cent.

“The reopening tailwinds are dissipating, and services growth will lose steam by next year. Singapore will not be spared from recession if the US and global economy slip into recession, given the large share of export-oriented sectors such as manufacturing, trade, and finance,” said Maybank economist Lee Ju Ye.

At a sector level, the outlook for the global electronics industry has “deteriorated rapidly” in recent months, MAS said: “Going forward, a sharper decline in final demand could presage an inventory correction of end products, which would exacerbate the fall-off in sales of intermediate semiconductor inputs, and in turn worsen the oversupply of chips.”

Growth prospects in Singapore’s financial sector will continue to be dented, and the outlook for “sentiment-sensitive segments” is expected to be bearish as global central banks keep tightening policy.

“The subdued performance in global equities is expected to restrain assets under management and fee income growth, and exert a drag on the fund management industry over subsequent quarters,” said MAS.

While recovery in the travel and consumer-facing sectors should continue, this momentum is likely to ease “as high inflation and the uncertain economic environment dampen consumer sentiment”.

This is even as the global economy “has entered a precarious ‘disequilibrium phase’, characterised by a growing divergence in growth and inflation outcomes”, said MAS, adding that it is unclear how long and how severe this phase will be.

“The stagflation risks were real from the start of 2022, but now the story has evolved to one where global central banks are more determined to move monetary policy into restrictive territory even if there is a real opportunity cost in terms of growth,” said OCBC chief economist Selena Ling.

Some economists believe Singapore, as an open and trade-dependent economy, could also be at risk of a disequilibrium, given the elevated inflation and slowing growth, which is the recipe for stagflation.

“Despite slowing growth, inflation will stay elevated in 2023, driven by domestic factors, especially cost pass-through to consumers from higher wages and rising business costs, as well as the GST hike,” said Maybank’s Lee, referring to the goods and services tax hike of 1 percentage point to 8 per cent from January.

Risks to the global outlook remain dependent on the path of global inflation, said MAS. If inflation dynamics are more entrenched than expected, central banks will be compelled to adopt more restrictive policy settings.

Persistently strong inflation would lead to a larger erosion of real incomes and restrain private consumption. “In such a scenario, the US and eurozone would be at risk of a deep and prolonged recession with attendant spillovers to externally oriented Asian economies,” MAS said.

The main factor driving the prospects of advanced economies, particularly in the US, is how much output must be sacrificed to rein in inflation and return to price stability, MAS said. It added that while the US may be able to achieve disinflation without a sharp, full-year recession, it is very likely that the eurozone could dip into a technical recession due to the impact of significantly higher gas prices and general cost and price pressures.

China’s economy should continue to recover, although the pace of expansion is likely to be weighed down by its zero-Covid strategy and the government’s pursuit of deleveraging the property sector, MAS said.

RHB senior economist Barnabas Gan said his base case is for a slowdown in global economic activity into 2023, but added that there is a risk of a “shallow and short” recession in the US. In such a scenario, US recovery in the second half of next year would power global GDP growth.