Singapore GDP growth likely to remain tepid after avoiding technical recession in Q2: economists

ALTHOUGH Singapore narrowly dodged a technical recession in the second quarter, as indicated by early data, economists believe growth is likely to remain tepid in the coming months amid the manufacturing downturn.

“The overall conclusion is that the glass is still half-empty, half-full for the Singapore economy,” said OCBC chief economist Selena Ling. “The anticipated recovery in the global electronics industry, especially for semiconductors, appears to be delayed towards Q4 or even early 2024, so the domestic manufacturing slump may persist into Q3 at least.”

Still, the services sector should see a tailwind from the uptick in overseas visitors in the second half of 2023, she noted, especially with the upcoming Formula 1 race and festive season in the fourth quarter.

“But one risk is that any sustained disappointment in China’s reopening pace, including their outbound tourist numbers, may imply that the mitigating effect the services sector can offer to offset the external demand drag may also wane with time.”

Concurring, Maybank economists Chua Hak Bin and Brian Lee said while services may remain supported by the recovery in tourism, growth is expected to ease with fading reopening tailwinds and slowing visitor arrivals momentum.

The services sector in Q2 expanded 3 per cent year on year, helping to offset the manufacturing sector’s deeper 7.5 per cent year-on-year contraction, advance estimates from the Ministry of Trade and Industry (MTI) showed on Friday (Jul 14).

This brought Singapore’s gross domestic product (GDP) growth to 0.7 per cent year on year, improving marginally from the previous quarter’s 0.4 per cent.

Sequentially, the economy expanded 0.3 per cent in Q2, swinging back from the previous quarter’s 0.4 per cent contraction.

Private-sector economists polled by Bloomberg had expected a 0.5 per cent year-on-year growth and 0.2 per cent quarterly contraction, which meant they were bracing for a technical contraction – defined as two consecutive quarters of quarterly contraction.

“We were primarily surprised at the relatively strong services growth of 3 per cent in Q2. Moreover, we note that other components may have lifted Singapore’s GDP growth,” said RHB senior economist Barnabas Gan, referring to utilities, ownership of dwellings and taxes on production and imports.

Given that MTI’s advance estimates are based on data from the first two months of the quarter, Gan said: “We pencil the balance of risks for GDP to be revised lower when the final print is out in August 2023.”

UOB senior economist Alvin Liew believes the risk of a technical recession lingers, especially if the contraction in June manufacturing turns out much worse than MTI’s implied projection, which would push quarterly growth into negative territory.

By Q3, some economists believe the export-oriented manufacturing sector could ease into a “fragile” recovery, beginning with positive sequential growth.

For now, most economists are keeping their full-year outlook, with just a couple saying they are downgrading their forecast.

Barclays is further reducing its outlook to 1 per cent, from 1.5 per cent, while DBS is lowering its forecast to 1.2 per cent, from 1.7 per cent.

Said DBS economist Chua Han Teng: “The downward revision considers the still-dicey global economic climate in H2, amid continued downside risks from advanced economies’ tight monetary policies and China’s bumpy recovery.”

Among the most pessimistic analysts are Oxford Economics, which is pencilling a growth of 0.4 per cent; UOB, 0.7 per cent; Maybank, 0.8 per cent; and Citi, 1.2 per cent.

In particular, Maybank economists said they are expecting MTI to narrow its forecast range to 0.5 per cent to 1.5 per cent, the lower bound of the current range of 0.5 per cent to 2.5 per cent. In May, the ministry had said growth was likely to “come in at around the mid-point” of its current range.

OCBC’s outlook sits at the mid-point of the official range at 1.5 per cent, while RHB is the most bullish with a 2 per cent forecast.

RHB’s Gan said: “Singapore is clearly showing very early hints of a recovery into H2; the economy has seen a recovery in momentum in high-frequency data in both non-oil domestic exports and industrial production.”

He added that the risk appetite may continue to recover on the back of near-peak rates seen in developed markets, with markets likely pricing in some rate cuts into 2024.