September cheer for manufacturers but MAS warns of slow, uneven recovery

Economists were expecting just 2.5% y-o-y growth in industrial production for September, but the actual figure was a “blockbuster” 24.2% y-o-y surge, says OCBC’s Selena Ling, who had estimated 3.2%. Two key sectors stood out: pharmaceuticals, and electronics, specifically semi-conductors, which is meeting higher demand for electronics devices and equipment.

“Manufacturing is exceptionally resilient in this pandemic recession as supply chains and trade flows faced only temporary disruptions,” Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye comment, on the latest numbers. They add that Singapore has benefitted from the “pandemic-induced demand” for semiconductors, pharmaceuticals and medical technology.

According to Ling, if this momentum carries into October and beyond, there is a stronger case for revising her GDP projections upwards. She now expects full-year 2020 GDP to contract 5%, versus an earlier estimate of a 5.5% decline. Ling also expects the official government GDP forecast range to be narrowed later this month to a contraction of 5–6%, from 5–7% now.

Chua and Lee of Maybank Kim Eng are more conservative. They estimate a contraction of 5.7–6% in 2020, before improving with a growth of 4% in 2021. These numbers are revised estimates that “pencils a further improvement in 4Q2020 GDP to –4% as services and construction normalise”, they say. They flag pharmaceuticals as a sector to watch, despite the volatility it has been facing. However, Ling warns of risks such as the need for another round of lockdowns in major economies, or uncertainty arising from the presidential elections in the US. “One risk is the scenario that President Trump gets a second term; he may double down on being tough on China, trade and tech, and this drags down general business and consumer confidence, which in turn weigh on global and regional growth recovery prospects going into 2021— albeit this is not our base-case scenario for now,” says Ling.

While the Singapore manufacturing sector can likely remain cheerful towards the end of the year, the Monetary Authority of Singapore (MAS) is warning of longer-than-expected recovery for the whole economy. For 3Q20, the economy contracted by 7% y-o-y, an improvement from the 13.2% plunge suffered in the preceding 2Q. However, the MAS reckons that such an improvement cannot be sustained. “Some pockets of the economy, particularly the travel-related and some contact-intensive domestic services, are not expected to re- cover to pre-pandemic levels even by the end of next year,” says the central bank in its half-yearly macroeconomic review on Oct 28.

These developments will result in reconfigurations in consumption patterns and the nature of some jobs, and thereby weigh on the labour market. “The nature of the Covid-19 shock has rendered this crisis to be deeper and likely more prolonged than past recessions,” it adds.

It notes that in previous recessions, Singapore’s economy took about four quarters to fall from peak to through. In contrast, the trough that occurred in 2Q2020 was far deeper than in past downturns. Similarly, the recovery in past recessions was symmetrical to the decline, with the economy taking three quarters to move from its trough to its performance prior to the crisis.

Furthermore, the lack of widely available vaccination in Singapore and abroad raises “threat[s] of repeated outbreaks that will continue to generate economic uncertainty, hampering a more decisive recovery”, it explains.

To this end, the MAS expects Singapore’s growth momentum to slow in 4Q2020 ending in December and the full-year contraction to fall within its official forecast range of 5–7%. It is looking at a modest 2021 with above-trend growth due in part to this year’s low base.