Resilience among the storm clouds
A GLOBAL downturn in 2023 is increasingly becoming the base case. Indicators which have a good track record of predicting recessions in the United States, such as the shape of the yield curve and the Conference Board Leading Economic Index, are flashing red.
Increasing the risk of a hard landing is the aggressive interest rate increases delivered so far by the US Federal Reserve. Not satisfied with already raising interest rates at its fastest pace since the 1980s, the Fed is prepared to hike rates further in order to get inflation under control, even if it inflicts more economic pain. Europe is going through an energy crisis as a result of the Ukraine conflict, which will lead to an economic contraction next year.
China has recently turned into a bright spot as the country abandons its Covid-zero strategy and moves swiftly to managing the virus as endemic. Recent plans to rescue its crisis-ridden property sector will also help to halt the slide. Yet, China’s reopening path will be bumpy and may not be enough to offset the sharp growth slowdown among the advanced economies. But at least the narrative and outlook for China in 2023 has vastly improved.
As a small open economy, Singapore’s growth prospects are heavily tied to the global economy. Should a global recession become reality next year, the impact on Singapore will be felt most among the export-oriented sectors. Some of the effects are already starting to become apparent. Non-oil domestic exports recently posted negative year-on-year growth in October. Export weakness is set to extend further, judging from more recent export data from neighbouring economies.
The manufacturing sector, due to its reliance on exports, has historically contracted during periods of weak global growth, acting as a major drag on the overall Singapore economy. Business sentiment in the manufacturing sector has fallen to its lowest level since the onset of the pandemic in early 2020.
Hence, manufacturing activity is set to be very weak in 2023. While it is still an important sector for Singapore, its contribution to overall growth is now surpassed by the information and communications technology (ICT), financial services and professional services sectors. In aggregate, these modern services now account for over a quarter of Singapore’s total gross domestic product (GDP), up from 15 per cent in 1990, and higher than manufacturing’s share of around 20 per cent.
Modern services not only averaged a higher annual growth rate than manufacturing in the past 15 years (6.5 per cent versus 5 per cent), this growth performance was achieved with much less volatility. For example, since 2000, the manufacturing sector suffered an annual growth contraction in five of those years. In contrast, the modern services sector only recorded negative growth in 2002, and even then, it was relatively mild at -1.3 per cent, with a strong rebound the following year. In terms of job opportunities, the modern services sector employs over 18 per cent of the Singapore workforce, compared to 12.5 per cent for the manufacturing sector.
While not immune to the global economic cycle, the modern services sector displays very strong defensive qualities which are contributing to the resilience of the Singapore economy. It is also a sector that the government is putting in a lot of effort to further expand. For example, the Financial Services Industry Transformation Map (ITM) 2025 was launched in September, laying out the growth strategies to further develop Singapore as a leading international financial centre in Asia. The government has also been investing heavily into projects that utilise emerging technologies such as artificial intelligence, machine learning, Internet of Things and data science, including developing more systems on cloud infrastructure and programmes to train industry-ready ICT professionals.
The Ministry of Trade and Industry (MTI) projects Singapore’s GDP growth to come in between 0.5 and 2.5 per cent in 2023, following an estimated 3.5 per cent growth in 2022. I see next year’s growth coming in closer to the upper half of MTI’s range, driven by a robust growth performance of the modern services sector. Though still a slowdown from this year, it will be a solid outcome given the weak global backdrop.
If China successfully navigates its reopening and spurs a strong rebound in economic activity, this will be a source of upside surprise for Singapore.
On the policy front, the Monetary Authority of Singapore (MAS) has tightened monetary policy aggressively to dampen inflation pressures. I expect the MAS to tighten again in 2023 to ensure that inflation expectations remain anchored, as the Goods and Services Tax increase will keep headline inflation elevated. But the government’s fiscal position has ample headroom to provide more support to lower-income households to cope with higher costs of living, while still returning towards a path of consistent surpluses.
While 2022 has been a year of unexpected negative surprises, the Singapore economy has managed to buck the global slowdown so far. Next year will be more challenging, but the resilience of the economy will be evident. With China now a potential source of upside surprise for a change, let us not get too sour on the outlook for 2023.
The writer is head of Asia research at ANZ.
