Q2's GDP rebound hints at upgrade to official growth outlook in August

Singapore

AN UPGRADE to Singapore's official growth outlook could come as early as next month, with the Republic having posted a stellar rebound in the second quarter, economists said.

Gross domestic product (GDP) jumped 14.3 per cent year on year in Q2, benefiting from the low base last year, when the economy contracted a record 13.3 per cent due to the "circuit breaker" from April 7 to June 1, according to advance estimates by the Ministry of Trade and Industry (MTI) released on Wednesday.

Sequentially though, GDP in Q2 contracted 2 per cent on a seasonally-adjusted basis, undoing the first quarter's gains of 3.1 per cent.

These numbers came below expectations for private-sector economists, who had predicted a 14.8 per cent year-on-year surge and a 1.8 per cent quarter-on-quarter contraction, a Bloomberg poll found.

In absolute terms, Q2's GDP is 0.9 per cent below its pre-pandemic level for the same period two years ago.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, said while the recovery from the depths of Q2 2020 is encouraging, "the upswing is exceptionally exaggerated by distortionary low-base effects".

"The double-digit growth print for Singapore's Q2 GDP is not a glamour shot of roaring, unfettered recovery, but rather glimmers of nascent pick-up extending, albeit subject to a bumpy path amid 'variant risks' and potential 'taper disruptions'," he said.

Still, Wednesday's data places Singapore's economic growth in the first half of 2021 at 7.4 per cent, and economists believe this is paving the way for an official upgrade to the full-year growth forecast, currently at 4 to 6 per cent.

Moreover, since flash estimates are based on data from the first two months of the quarter, several economists believe the final estimate for Q2 could be revised upwards, given that restrictions began easing from mid-June.

Barclays regional economist Brian Tan said he is expecting it to be raised to 6 to 8 per cent when MTI releases its next Economic Survey of Singapore in August.

"This is partly due to the favourable base effects; our projections suggest that full-year GDP growth would be on track to hit 5.1 per cent, even if seasonally adjusted GDP remained flat at Q2 levels through the rest of this year," said Mr Tan, who is maintaining his 2021 forecast at 7 per cent.

Maybank Kim Eng economists believe the official growth forecast could be upgraded to 6 to 7 per cent.

They are also raising their outlook from 6.2 per cent to 6.8 per cent, given the "stronger-than-expected manufacturing performance and rapid vaccine rollout".

UOB economist Barnabas Gan is upgrading his full-year outlook to 6.5 per cent, up from 5.5 per cent, owing to the "surprisingly strong performance in Q2 amid a rosier economic prognosis ahead".

Some economists saw the quarter-on-quarter contraction as a temporary setback caused by the tighter Covid-19 measures in April and May.

Sung-Eun Jung, an economist from Oxford Economics, said: "The vaccination rate has picked up, which will likely allow restrictions to ease further. The government has also switched gears from eradicating the virus to dealing with an endemic Covid-19."

Manufacturing is also likely to remain a key driver of GDP. The sector expanded 18.5 per cent year on year, but dipped 1.8 per cent sequentially.

HSBC economist Yun Liu said: "Manufacturing remains a bright spot, as a marginal pull-back in sequential growth needs to be put in the context of roaring industrial production in Q1. Thanks to elevated global demand for chips, both semiconductor and precision-machinery production and exports continued to outperform."

However, economists from DBS and Maybank Kim Eng believe manufacturing momentum could begin to moderate in the second half of 2021.

Said DBS senior economist Irvin Seah: "Existing shortages of semiconductor chips will put a lid on the pace of expansion in the electronics cluster, even though global demand for high-end electronics parts and components remains strong."

HSBC's Ms Liu noted that the recovery in other sectors tells a divergent story, with services and construction activities hampered by tighter restrictions.

"Even before the recent outbreak, recovery in consumer-oriented services has been bumpy, given lingering labour market concerns. The recent outbreak has further stalled its recovery," she said.

For now, economists are keeping an eye on Q3's economic indicators for a hint of the Monetary Authority of Singapore's (MAS) monetary policy review in October.

OCBC chief economist Selena Ling, referring to the Singapore dollar effective exchange rate policy band, said: "Any optimism spilling over to 2022 growth and core inflation dynamics may warrant at least a rolling back of dovish rhetoric, even if it may fall short of pulling the trigger for a recalibration of the S$NEER parameters just yet."

Citi economists, meanwhile, believe policy normalisation could kick in in April next year, but upside inflation risks and cost pressures could push this earlier to October.

Agreeing, DBS' Mr Seah said MAS will be on "heightened alert" if inflation continues to "trend higher".

"As economic recovery continues and external price pressure builds up, the risk of a pre-emptive action by the authority in October should not be discounted," he said.