Economists maintain outlook despite better-than-expected 2020 GDP data

Singapore

IT'S the worst recession on record, but Singapore's 2020 economic contraction has turned out to be slightly milder than expected at 5.8 per cent year on year - just a notch lower than the official forecast of a 6 to 6.5 per cent contraction.

Still, it's not quite enough for most economists to revise their 2021 outlook, even though advance estimates of Q4's gross domestic product (GDP) outperformed their expectations by close to a percentage point, shrinking 3.8 per cent.

Instead, many are projecting a long and uneven recovery that will hinge on vaccine rollout.

"While Q4 and 2020 full year were better than expected, our core view on 2021 hasn't changed significantly," Selena Ling, OCBC chief economist, told The Business Times.

"While global and domestic vaccination has started, it will take some time to prove effectiveness and to re-open borders. So, Q1 may see around zero per cent year-on-year growth, possibly slightly negative still," she added.

UOB economist Barnabas Gan said one reason is the uncertainty that continues to surround Covid-19, even though vaccination efforts have begun in Singapore and several other countries.

"The uncertainty over the evolution of the virus, knowing that there are new strains of the virus in the UK would likely still inject some element of uncertainty as to how effective the vaccine could be," said Mr Gan.

Assuming the vaccines are also effective against the new strains, Singapore could be looking at a 5 per cent expansion this year, he added, placing his prediction in the middle of the official forecast of 4 to 6 per cent.

Most economists agree that much of the recovery is likely to gain momentum only in the second half of the year, with the first half looking gradual and uneven.

Irvin Seah, DBS senior economist, is projecting a 2021 growth rate of 5.5 per cent, although he said GDP figures in the first half of the year will be "highly volatile" due to the base effects of 2020.

Citi economists believe further recovery in domestic demand would likely be constrained in the near term by the continued weakness in tourism and large labour market slack, notwithstanding the shift to Phase 3 of reopening.

"We also keep a close eye on possible renewed infection waves in the community, which could halt or even reverse the reopening process," Citi economists said. They are expecting 2021 GDP to grow 5 per cent.

The manufacturing sector, the star performer in 2020, is likely to continue leading Singapore out of the recession.

"Further adoption of 5G networks and Wi-Fi 6, on top of the continued proliferation of AI, IoT, EVs (electric vehicles) and introduction of new smartphone models and wearable devices will continue to drive demand for high-end electronics parts and components," said Mr Seah.

However, opinions were mixed as to whether the sector will be able to maintain its growth momentum - of a 9.5 per cent and 7.1 per cent expansion in Q4 and the full year respectively - into 2021.

"Manufacturing has already staged a strong rebound in 2020 and may struggle to repeat the V-shaped performance in 2021," said Maybank Kim Eng senior economist Chua Hak Bin, who is projecting 4.5 per cent growth in 2021.

However, Mr Gan said there are new factors that could boost manufacturing this year, including the anticipated ratification of the Regional Comprehensive Economic Partnership (RCEP) and US President-elect Joe Biden's more favourable attitude towards multilateralism.

The construction sector saw a decline of 28.5 per cent in Q4, easing from Q3's 46.2 per cent contraction. Economists are posting a positive outlook for this sector, given the pipeline of residential and infrastructure projects.

The services sector could be a mixed bag, as recovery remains uneven across different service segments.

"The non-trade-related sectors, such as the finance and insurance sectors would still likely be in expansion territory, but the trade-related ones - for example wholesale and retail as well as transportation and storage - would likely still be in the doldrums," said Mr Gan.

Jeff Ng, senior treasury strategist at HL Bank, believes air travel, tourism, food and accommodation would likely stay sluggish in the near term, until vaccination rates climb and global economic activity levels normalise.

As the year opens, all eyes are now on Budget 2021, slated for Feb 16, as analysts speculate whether measures such as the Jobs Support Scheme will be extended.