Singapore poised for further recovery in 2022 amid external headwinds, inflation

COMING off a stellar rebound from the worst recession since independence, Singapore is poised for further recovery in 2022 although external headwinds continue to weigh on the outlook, economists said.

The economy grew 7.6 per cent in 2021, beating an advance estimate of 7.2 per cent, according to data from the Ministry of Trade and Industry (MTI) on Thursday (Feb 17).

This is a turnaround from 2020, when the economy shrank 4.1 per cent, although this is a revised figure from the earlier-published 5.4 per cent contraction.

On the whole, gross domestic product (GDP) growth in 2021 was driven mainly by the manufacturing, finance and insurance and wholesale trade sectors, Gabriel Lim, permanent secretary of MTI, told reporters at a briefing.

For 2022, MTI is sticking to its forecast of 3-5 per cent.

On one hand, Singapore's external demand outlook has "deteriorated slightly", Lim warned, with the Omicron variant causing a global surge in Covid-19 cases amid persistent supply bottlenecks and rising energy prices. The trajectory of the pandemic remains a risk, he added.

At the same time, prospects for outward-oriented sectors remain strong amid the global economic recovery, he said. Singapore's signal to progressively ease Covid-19 restrictions and expand the Vaccinated Travel Lanes (VTL) scheme also bodes well for the growth of the consumer-facing sectors as well as the aviation and tourism-related sectors, although the latter two are expected to remain below pre-pandemic levels even by end-2022.

OCBC chief economist Selena Ling said the road ahead "definitely looks brighter", even if the official forecasts have not shifted the needle for a "return to steady trend growth story".

"In fact, the latest announcements of simplification of Covid-19 curbs and resumption and expansion of VTLs reinforce our expectations that there could be upside risks to our 3-5% GDP growth forecast for this year," said Ling.

Concurring, UOB economist Barnabas Gan said Singapore's overall economic prognosis remains optimistic, given the strong end to 2021.

"Despite the relatively high base data seen in 2021, Singapore's economy is expected to stay underpinned by the favourable export and manufacturing sectors. This is especially due to the expected recovery for Singapore's key trading partners as they bolster their vaccination efforts into 2022," said Gan. His growth outlook for 2022 is 3.5 per cent.

DBS senior economist Irvin Seah, who is also expecting 3.5 per cent growth, believes recovery would become more broad-based as restrictions ease.

"As Singapore pushes to inoculate the remaining population and presses forward with reopening the economy, particularly revitalising the struggling travel-related sector, contributions to GDP growth from the various sectors will become less lop-sided, and the recovery will become more even," he said.

Other economists were more optimistic. The Maybank team is pencilling in a 3.8 per cent growth, while Wei Zheng Kit from Citi is predicting a 4.5 per cent growth and Brian Tan from Barclays, 5.5 per cent.

Sung Eun Jung, senior economist at Oxford Economics, had a more cautious view, noting that external headwinds are likely to weigh on trade in the first half of 2022.

"While export momentum should improve in H2 as global supply chain disruptions gradually ease and a wider vaccination coverage bolsters demand in South-east Asian economies, we have turned more cautious on Singapore's domestic demand outlook due to rising inflationary pressures and tightening macro policies," said Jung, who is expecting 3.4 per cent growth.

DBS's Seah also believes inflation will be a "crucial risk", with core inflation reaching 2.1 per cent in December, the highest since 2014.

"In the immediate term, monitor the Russia-Ukraine crisis closely because it could further propel oil prices, exacerbate inflation, and potentially derail the recovery," he said.

Barclays' Tan noted that wage and inflation pressures are likely to grow, now that signs of labour shortages are emerging with unemployment rates back at pre-pandemic levels. This paves the way for the Monetary Authority of Singapore to further tighten monetary policy in April, although Seah said this could have a "cooling effect" on growth.

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