Economists ‘cautiously optimistic’ about Singapore economy in 2023, banking on China’s reopening

CAUTIOUS optimism appears to be the general sentiment among economists, many of whom are hopeful China’s reopening would provide a lift for the region, even as Singapore’s 2022 growth numbers missed the mark by a notch on Monday (Feb 13).

“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 EU,” Maybank economists Chua Hak Bin and Lee Ju Ye said.

“The inverted US yield curve is pointing to a high 30 per cent probability of a 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,” they added.

Echoing this view, RHB senior economist Barnabas Gan said the global trade outlook has been improving since China pivoted from its strict zero-Covid policy early this year.

“Beyond this, indicators suggest that supply chain challenges are also easing, leading to softer commodity prices and inflationary pressures,” he said. “Despite the impending slowdown, we do not expect a technical recession in H1.”

A technical recession occurs when there have been two consecutive quarters of contraction.

This comes even as Singapore’s gross domestic product (GDP) growth last year came in at 3.6 per cent, revised down from January’s advance estimate of 3.8 per cent, data from the Ministry of Trade and Industry showed on Monday.

In 2021, the economy expanded at 8.9 per cent growth rate, which has been revised upwards from the earlier figure of 7.6 per cent.

Fourth-quarter GDP growth was 2.1 per cent year on year, revised down from the advance estimate of 2.2 per cent and moderating from Q3’s 4 per cent.

The manufacturing sector, which had kept the economy afloat during the Covid-19 pandemic, grew just 2.5 per cent for the full year, down from 13.3 per cent in 2021. Growth in the construction sector moderated to 6.7 per cent, while the services industries saw growth ease to 4.8 per cent.

Still, MTI permanent secretary Gabriel Lim told reporters on Monday that Singapore’s external demand outlook for 2023 has improved “very slightly” since the last report in November.

“China’s faster-than-expected reopening from the Covid restrictions will definitely not just help benefit Singapore’s sectors – for example, tourism, aerospace and so on – but also uplift regional economies, which will in turn also have a positive second-order effect on Singapore,” he said.

Lim cautioned however that this ought to be seen in the context of other broader challenges and issues elsewhere, such as in the United States and the eurozone.

These include, he said, the impact of tighter financial conditions across many advanced economies on global growth, as well as the risk of further escalations in the Russia-Ukraine war and other geopolitical tensions. The growth outlook for other outward-oriented sectors also remains weak given the broader slowdown in the global economy.

For these reasons, MTI is keeping its GDP growth forecast for 2023 at 0.5 to 2.5 per cent, Lim said.

While private-sector economists are similarly maintaining their outlook, several noted that their numbers are above the 1.5 per cent midpoint of the official forecast.

Maybank’s estimate is 1.7 per cent; OCBC’s, “slightly under” 2 per cent; Barclay’s, 2.2 per cent; and RHB, 3 per cent.

Noting that Singapore’s growth momentum is likely to pick up in H2, RHB’s Gan said: “US rate hikes may take a pause after the first half of the year, and optimism may return once markets price in some rate cuts into 2024.”

Meanwhile, the services sector recovery, driven by the revival in international travel, is likely to provide a significant offset against weaker manufacturing activity this year, said Barclays regional economist Brian Tan.

But OCBC chief economist Selena Ling believes Singapore’s 2023 growth prospects “have not fundamentally shifted as global dark clouds still loom”, adding that Q1 growth could decelerate further, resulting in a “choppy” growth trajectory for H1.

She said while China’s reopening bodes well for regional growth momentum, it may not be sufficient to offset the slowing demand from major economies like the US, eurozone and the United Kingdom.

“Moreover, the current bout of semiconductor weakness may last until H2 and prove a deadweight on electronics and manufacturing growth prospects at this juncture,” she said, adding that the geopolitical landscape remains volatile. The services sector is likely to continue doing the “heavy-lifting”.

UOB was among the most pessimistic, with senior economist Alvin Liew pencilling in a modest 0.7 per cent growth for 2023 due to the “faltering outlook” for electronics and weaker external demand.

Meanwhile, Singapore’s current monetary policy stance remains appropriate, said Edward Robinson, chief economist at the Monetary Authority of Singapore (MAS).

“The recent out-turns in inflation and growth have come somewhat closer in line with our expectations, and MAS’s next policy review accordingly is scheduled for April 2023,” he said. “The cumulative effects of the monetary policy tightening since October 2021 will slow the inflation momentum and ensure that price pressures do not become entrenched in the economy.”

Citi economists said they are maintaining their expectation of a “final” monetary policy tightening move in April, noting that their forecast for core inflation in Q1, at 5.6 per cent, is higher than the central bank’s forecast of “around 5 per cent”.

Said Citi economists Kit Wei Zheng and Jester Koh: “MTI’s less cautious view on the growth outlook raises the possibility that officials may eventually see China’s reopening imparting gradual and persistent support to growth through 2023, that may potentially prolong the inflation cycle.”

Still, they added that any further tightening moves are likely to be less aggressive than in 2022.