Singapore maintains GDP forecast for 2021, but economy not yet out of the woods

WHILE Singapore's economy shrank in 2020 by a smaller margin than the government's earlier estimates, analysts say the Republic is not yet out of the woods, with a slowing and uneven recovery on the horizon, and significant uncertainties in the external outlook.

On Monday, the Ministry of Trade and Industry (MTI) said in its latest Economic Survey of Singapore report that the economy contracted by 5.4 per cent last year - a shade better than the advance estimate of a 5.8 per cent contraction, and above the official forecast range of -6 and -6.5 per cent.

MTI also maintained its growth forecast of between 4 and 6 per cent for the whole of 2021.

"This latest set of figures is consistent with our long-held view that the economy is on a recovery path after the strong rebound in Q3 and the trough registered in Q2," said DBS economist Irvin Seah.

"However, the pace of growth has slowed, as this V-shaped recovery turns into a square root-shaped trajectory."

A square root-shaped recovery describes an economy rebounding sharply from a trough, but settling into a plateau, resembling a square root sign.

Mr Seah also foresees growth momentum to be "tepid and uneven", with varying paces across different countries, industries, and segments of society.

Selena Ling, OCBC Bank's head of treasury research and strategy, noted that despite the better-than-expected figures, 2020 still marked the worst recession year in Singapore's recent economic history.

"While there was a clear sequential improvement in economic activity and growth momentum in the second half of last year, with the phased re-opening of economic activities, it is still far from (...) pre-Covid levels for broad swathes of the Singapore economy," she said.

UOB economist Barnabas Gan said the latest data is "markedly better" compared to the initial advance estimates by MTI. However, he noted that the Republic's services and construction sectors stayed soft in the final three months of 2020.

Specifically, tourism-related sectors remained "in the doldrums" with the slump in international travel, said Mr Gan.

Year-on-year declines persisted in transportation and storage (-27.4 per cent), accommodation (-19.7 per cent) and food and beverage (-19.0 per cent).

Similarly, the construction sector has continued to fall for its fourth consecutive quarter at -27.4 per cent year-on-year.

Mr Gan said that while this was an improvement from Q3 2020's plunge of -52.5 per cent, construction activity may yet fall further in Q1 2021, as Singapore's construction contracts awarded fell 28.7 per cent year-on-year in Q4 2020 - clocking five straight quarters of contraction.

Looking ahead, growth forecasts for 2021 by DBS, OCBC, Maybank Kim Eng as well as UOB economists all fall within MTI's forecast range of between 4 and 6 per cent.

While vaccine deployment has progressed, analysts highlighted that elevated risks remain.

"The global surge in Covid-19 infections and the emergence of new virulent strains are indeed disconcerting," said Mr Gan, who cited resurgences in infections and renewed pandemic control measures in Indonesia and Malaysia.

"Global economic recovery will also depend on the adequacy and efficacy of vaccine supplies," he added.

He pointed to pockets of geopolitical tensions between China and Taiwan at the start of 2021, and between China and India since 2020, as potential headwinds for recovery.

Conversely, Mr Gan hopes that new US President Joe Biden will take a "more constructive and multilateral approach" in trade, which could benefit Singapore as a trade-reliant economy.

On balance, analysts agree: recovery will be protracted and uneven, in line with MTI's prognosis.

The ministry's report on Monday cautioned that Singapore's GDP was unlikely to return to pre-Covid levels until the second half of the year, at the earliest. The pace of recovery will also differ across sectors.

"Outward-oriented sectors such as manufacturing and wholesale trade are projected to benefit from the pick-up in external demand," said Gabriel Lim, permanent secretary of trade and industry.

He said the tourism and aviation-related sectors, retail, and food & beverage services were unlikely to return to pre-Covid levels, even by the end of 2021.

The construction and marine and offshore engineering sectors are also projected to see a slow recovery over the course of the year, Mr Lim added.