Singapore halts economy's slide one year into pandemic; MAS stands pat on policy stance

A government survey of 24 private-sector economists in February projected a decline of 1.1%. Economists polled by Reuters earlier this month had expected a dip of 0.2%, instead of the first year-on-year growth since the pandemic hit more than a year ago.

“Posting a positive growth for the first quarter provides hope for a steady recovery for the rest of the year, as the country is ramping up with the roll-out of vaccines,” reckons Cai Daolu, visiting senior fellow at the NUS Business School’s Department of Strategy & Policy.

For the ongoing second quarter, a much bigger jump will be seen, due to the unprecedented 12.6% plunge in the second quarter of last year when large swathes of the economy were in a lockdown. “But base effects will fade and second half 2021 growth will come back down to earth. Hence, an upgrade to the official 2021 GDP growth forecast range would likely only come earliest after the 2Q2021 GDP growth data is released, in our view,” says Selena Ling, OCBC’s head of treasury research and strategy.

In any case, citing the faster-than-expected recovery, JP Morgan economists Sin Beng Ong and Arthur Luk have raised their 2021 GDP growth estimate from 5.7% to 7.8%, which is significantly faster than even the “upper end” official forecast range of 4% to 6%.

“Singapore’s effective institutional response to contain Covid-19 means policymakers have been able to gradually relax the social restrictions and re-open more sectors of the economy, which would help to keep the economic recovery on track,” write Morgan Stanley economists Zac Su and Deyi Tan, who are expecting 2021 growth to hit 7.4%.

“Notably, policymakers have also been pushing to reopen the borders in a gradual and safe manner and revive Singapore’s position as a global travel hub,” they say, adding that Singapore’s economy has already recovered close to its pre-Covid-19 GDP levels in the last quarter, and will likely decisively surpass those levels in 2Q2021.

However, the recovery is uneven, warns Irvin Seah, senior economist at DBS Bank. For one, a key lift to the economy came from the 7.5% y-o-y growth registered by the manufacturing sector (see table). This was supported by output expansion in sectors such as electronics, precision engineering, chemicals and biomedical engineering.

Seah expects the manufacturing sector to continue to grow in the upcoming quarters, as global companies look to digital solutions and new technologies to compete effectively in the post-Covid-19 business environment. The roll-out of other technologies, such as the 5G networks, electric vehicles and new generation wi-fi systems, will drive demand for high-end electronic components, and in turn benefit Singapore’s manufacturing sector, he adds. The only deterrence Seah foresees is a global shortage of semiconductor chips.

The information & communications, finance & insurance and professional services sectors had also contributed to the economy in 1Q2021 with its 3.7% increase. This is thanks to a stronger take-up across all the sectors, save professional services which had taken a hit from the weaker economy and sluggish construction works.

However, the other major economic sectors remained in the red, with construction registering the deepest decline of 20.2% y-o-y. Its laggard performance can be attributed to labour shortage and safe-distancing requirements, market watchers point out. Still, it can expect a pick-up as there is a strong pipeline of residential and infrastructural projects, including those held back and also new ones. “Historically, the construction sector tends to be more volatile and pro-cyclical. As we recover from this economic downturn, the construction sector is expected to bounce back quickly,” says NUS’ Cai.

Meanwhile, the wholesale & retail trade and transportation & storage sectors shrank by 4.1% in 1Q2021, which weighed down the overall performance of the services-producing industries to –1.2%. Their collective performance comes from the restrictions to air, sea and land transport that have been imposed to curb the spread of the coronavirus.

Other sectors such as accommodation & food services, real estate, as well as administrative & support services — which are also part of the services sector — shrank by 3.9% in the first quarter of the year. This is as all the sectors continued to be burdened by the constraints arising from the implementation of safe management measures. Accommodation was the only one to expand, thanks to the low base of 2020 and domestic demand, since the option to free travel was not readily available.

DBS’ Seah expects the services-producing sectors to turn in a mixed report card until the borders are reopened. Unfortunately, this does not seem likely in the near term since only 670 million, or about 8.6% of the world’s 7.8 billion population, have been vaccinated. As such, the outlook for the hospitality and aviation sectors remains bleak, while that for trade-related services, retail, financial and ICT services is showing signs of slowing momentum, notes Seah, who is expecting a full-year 2021 GDP growth of 6.3%.

United Overseas Bank (UOB) economist Barnabas Gan is envisioning a K-shaped recovery with outward-facing sectors like manufacturing performing well on the back of global growth. On the other hand, domestic sectors such as construction and services are likely to “see headwinds, especially if Covid-19 risks stay elevated globally”, says Gan, who is looking at a 5.5% expansion in Singapore’s economy this year.

Neutral stance

With things looking up for Singapore’s economy, the Monetary Authority of Singapore (MAS) has maintained its policy stance at its half-yearly review on April 14. This neutral position is consistent with the stance it adopted in its previous review in October, and is in line with market watchers’ expectations.

A neutral stance means that no change has been made to the width of the band in which the Singapore dollar nominal effective exchange rate (S$NEER) is allowed to float. At the same time, the slope of the band — which indicates its rate of appreciation — and mid-point have been left untouched. With this, the central bank is maintaining a 0% per annum rate of appreciation of the policy band. The last time these parameters were tweaked was in March 2020, when the slope to a 0% appreciation gradient was flattened and the S$NEER was re-centred lower.

The latest move follows the improvement in the global economy, thanks to the additional fiscal stimulus and the deployment of vaccines in several major nations, says MAS. Its decision to stay pat comes amid a soft inflation outlook.

“As core inflation is expected to stay low this year, MAS assesses that an accommodative policy stance remains appropriate,” it elaborates in its policy statement. Core inflation —which gauges price increments to sectors other than accommodation and private transport — has reversed from –0.2% in 4Q2020 to log a 0% y-o-y increase between January and February this year. This reflects the fading disinflationary effects of government subsidies disbursed to healthcare and education services in 1H2020, MAS notes.

Meanwhile, headline, or all-items, inflation — which measures the total level of inflation in the economy — is tipped to come in between 0.5% and 1.5% in 2021. This is an improvement from MAS’ previous forecast range of –0.5% to 0.5%, due to the stronger increases in private transport and accommodation costs in the first two months of the year. The central bank is expecting private transport costs to stay resilient, amid better consumer sentiment and reduced certificate of entitlement (COE) quotas for motor vehicles.

MAS’ latest stance is “merely a delicate dial back, not an abrupt abandonment of dovish bias”, reckons Vishnu Varathan,who heads the economics and strategy division of Mizuho Bank. A dovish bias occurs when the inflation rate is not high enough to warrant concern by a central bank.

Breaking down the MAS’ announcement, Varathan says its omission that the present stance will hold “for some time” indicates the possibility of “calibrated slope reinstatement of S$NEER appreciation bias (positive slope) as early as October”, which is when its next half-yearly announcement will be made. With no guarantee on this, he maintains that the S$NEER slope will stay flat at least till April 2022.

DBS’ Seah too reckons that the central bank’s October policy decision will be trickier. “It will depend on the dynamics between growth and inflation, and overlay with the risk ahead, not just domestically but also externally,” he suggests. So, the MAS may choose to take a pre-emptive approach if inflation is a concern, or adopt a slightly passive stance otherwise.

For now, market watchers are adopting a wait-and-see approach. This is as the negative output gap in the economy will only narrow through the course of this year or early next year if the current growth trajectory persists. In line with this, the subdued wage growth is also expected to persist till 2H2021, till the slack in the labour market is fully absorbed, says Seah.