Singapore’s full-year growth will depend on how well manufacturing holds up: analysts

THE direction of Covid-19 policy in China has emerged as a key downside risk to Singapore’s economic outlook, as the Ministry of Trade and Industry (MTI) on Wednesday (May 25) warned that external demand looks weaker now than it did 3 months ago.

And, following Russia’s shock invasion of Ukraine in late February, inflation from higher commodity prices was cited as another threat, with the MTI announcing that gross domestic product (GDP) growth will likely fall in the lower half of its 3 per cent to 5 per cent forecast range in 2022.

Even though Singapore’s GDP beat advance estimates to expand by 3.7 per cent year on year in the first quarter, private analysts were torn on the extent of the impact of a possible Chinese economic slowdown on Singapore’s manufacturing sector and growth prospects.

“Since our last media briefing in February, the external economic environment has unfortunately deteriorated, due in part to the Russia-Ukraine conflict,” said Permanent Secretary for Trade and Industry Gabriel Lim, naming “stringent measures implemented in China to contain its domestic Covid-19 outbreaks” as another challenge.

Noting that “the growth outlook for some outward-oriented sectors in the Singapore economy has weakened”, Lim told reporters: “As China is a key market for petroleum and chemicals products from Singapore, its economic slowdown is likely to adversely affect the growth prospects of Singapore’s chemicals cluster and the fuel and chemical segment of the wholesale trade sector.”

That’s even as manufacturing led Singapore’s first-quarter growth with an outsized expansion of 7.1 per cent, supported by electronics, transport engineering, general manufacturing and precision engineering. Services expanded by 4.2 per cent, and construction, 2.1 per cent.

Selena Ling, chief economist at OCBC, told The Business Times (BT) that the economic impact of the slowdown in China is still developing – “the key uncertainty being how long the Chinese lockdowns will last and whether restrictions will get tighter or looser from here”.

A sharp slowdown in growth and demand in China – and the possibility of prolonged supply chain problems – would hurt both Singapore and regional manufacturing production, she said.

DBS senior economist Irvin Seah – who, like UOB economist Barnabas Gan, expects growth of 3.5 per cent this year – also warned that the manufacturing sector declined by 0.2 per cent on a seasonally adjusted, quarterly basis in the January-March period, after 4 straight quarters of expansion.

“Though this is likely part and parcel of the normalisation process, downside risk is emerging, which could take further toll on this key engine of recovery,” he said in a report.

On a seasonally adjusted, quarterly basis, the economy grew by 0.7 per cent in the first quarter.

Still, Seah separately told BT that second-quarter GDP growth could turn mildly negative on a sequential basis, “which will then raise the risk of a technical recession if the external headwinds continue to build”. A technical recession is 2 straight quarters of quarter-on-quarter contraction.

A report from Citi noted that sequential GDP growth for the rest of the year will have to average at least 0.4 per cent each quarter, for full-year growth of 3.5 per cent or more.

Brian Tan, an economist at Barclays, has already observed that MTI’s latest growth forecast “appears to assume at least a quarter of sequentially declining GDP some time this year”.

But Tan’s own estimates point to rosier full-year growth of 4.9 per cent, which he said in a note “represents a solid economic recovery, as the strength of 2021 GDP growth was exaggerated by the outsized base effects arising from the initial impact of the pandemic in 2020”.

Other watchers were also more upbeat about manufacturing resilience and GDP performance than the official growth forecasts implied.

Nomura economists Euben Paracuelles and Charnon Boonnuch have maintained an above-consensus full-year forecast of 4.4 per cent, which they said in a flash note “is premised on our view of a strong manufacturing sector”.

Besides strong demand for electronics and pharmaceuticals, the sector will be supported by segments such as aerospace, food and beverage, petroleum, and petrochemicals, they said.

Indeed, MTI chief economist Yong Yik Wei told the press briefing: “Even as we talk about a deterioration in external economic environment – which is true, and there are a tremendous amount of downside risks – we are also looking at upgrades in some externally-oriented sectors.”

She cited “electronics, because of a robust semiconductor demand, and the associated industries linked to the tech cycle” as industries that are poised to continue lifting growth.

With international borders reopening substantially from March onwards, HSBC economist Yun Liu added that Singapore’s growth trajectory “is more than just manufacturing”.

After the uneven showing in the services sector over the past 2 years, she called it “encouraging to see growth broadening out to travel-related sectors as more visitors flock to the country”.