Singapore's output gap tipped to close earliest by mid-2022

SINGAPORE'S negative output gap could close by mid-2022 at the earliest, as a broad recovery swept across all sectors in the third quarter, according to advance estimates on Thursday (Oct 14).

Gross domestic product (GDP) in Q3 grew 6.5 per cent year on year, data from the Ministry of Trade and Industry (MTI) showed, coming in just a notch below the 6.6 per cent growth that private sector economists' polled by Bloomberg had predicted.

Meanwhile, Q2's final print has been revised to 15.2 per cent, from 14.7 per cent, while Q1 is now at 1.5 per cent rather than 1.3 per cent. The jump in Q2 was due to low base effects, as the country during the same period last year was in the midst of a 8-week "circuit breaker", or partial lockdown.

While year-on-year growth slowed in Q3, the economy improved on a sequential basis, expanding 0.8 per cent, up from the previous quarter's 1.4 per cent contraction.

On the same day, the Monetary Authority of Singapore struck an optimistic note in its half-yearly monetary policy review, expecting GDP to remain "above trend" in the quarters ahead. The official 2021 forecast, however, remains unchanged at 6 to 7 per cent.

"Barring a resurgence of the virus globally or a setback in the pace of economic reopening, output should return to around its potential in 2022," the central bank added.

Economists however had varying opinions on when this could happen.

Citi economists said this could happen by mid-year, while tight supply could bring this forward.

OCBC chief economist Selena Ling sees the negative output gap closing by end-2022, with the manufacturing sector taking the lead while services and construction continue to lag.

Oxford Economics senior economist Sung-Eun Jung believes 2022 may be "a tad optimistic", believing the output gap could close in early 2023 as growth dynamics are improving.

Even so, Jamus Lim, an economist at ESSEC Business School Asia Pacific, said the potential growth rate for Singapore is likely to be "substantially lower" than that in the recent past, adding: "My own estimates are closer to 3.5 per cent, as opposed to the high single digits of yesteryears."

On the whole, all industries saw growth in Q3, although momentum has eased from Q2.

With a year-on-year growth of 7.5 per cent, manufacturing remains in the "driving seat", said DBS senior economist Irvin Seah, but momentum is waning despite the strong investment in digital solutions. Quarter on quarter, the sector was flat in Q3.

"Industrial output was dragged down by slowdown in growth momentum in China, including the closure of Ningbo port, the world's third busiest in August, and resurgence in Covid-19 infections in many Asia economies," Seah said.

The construction sector saw year-on-year growth surge 57.9 per cent, although this is far slower than the whopping 117.5 per cent expansion in Q2. MTI noted that the value-added of the sector remained 25.1 per cent below its pre-pandemic level, as construction activity continued to be weighed down by the labour crunch and border restrictions.

Said UOB economist Barnabas Gan: "While we expect the construction sector to rise 15.5 per cent in 2021, we remain cautious due to the Covid-19 pandemic especially in the migrant community, where an exacerbation of Covid-19 infection could affect labour-intensive industries such as construction."

The services sector grew 5.5 per cent year on year on the whole, easing from Q2's 10.8 per cent. But several economists believe things could be looking up for the sector as Singapore gradually reopens its borders.

"We expect the services sector to continue to rebound from a very low base. Retail, transportation and storage sectors would benefit from further reopening of borders. The professional services sector would also benefit as the economic activity in the region picks up again," said Priyanka Kishore, head of India and South-east Asia economics at Oxford Economics.

Despite the overall cautious optimism, most economists said they are keeping their full-year forecast.

Maybank Kim Eng economists are maintaining their outlook at 6.8 per cent with the expectation that domestic demand will continue improving in the fourth quarter.

Citi, DBS and OCBC are keeping to a 6.7 per cent growth, while Barclays and UOB are sticking with 6.5 per cent.

Laying out the risks, Citi economists said upside ones may materialise on faster border reopenings, such as an expansion of the vaccinated travel lanes.

However, downside ones include a further slowdown in external demand that may be related to China's energy crisis, more severe labour constraints on construction as well as pandemic-related demand headwinds, possibly caused by new variants, Citi said.

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