The past week has been an eventful one for Singapore — it started off with a 56th birthday celebration and the easing of Covid-19 restrictions. On Aug 11, the Ministry of Trade and Industry (MTI) upgraded its growth forecast range for the year to 6% to 7%, from its previous 4% to 6% prediction.
This comes as “the recovery in external demand for Singapore for the rest of the year remains largely on track”, says Gabriel Lim, Permanent Secretary for Trade and Industry. Speaking at a virtual press conference on Aug 11, Lim added that a pick-up in vaccination rates in key advanced economies like the US and the Eurozone has weakened the link between infections and deaths, thus allowing them to press on with their reopening plans.
However, he cautions that downside risks remain as the so-called delta variant of the coronavirus rages on. He warns that the ongoing economic recovery will be derailed if the vaccination progress stalls and if there is a need to re-impose restrictions to curb a resurgence in infections.
Nonetheless, Singapore’s fight against Covid-19 is now on a more advantageous ground with seven in 10 residents being fully vaccinated as of Aug 9. The city-state’s economy is also in seemingly good shape, for it expanded by 14.7% y-o-y in 2Q2021, albeit from the low base of last year when the lockdown was in all but name. In 2Q2020, Singapore’s economy suffered an unprecedented plunge of 13.3% y-o-y.
However, in absolute terms, GDP remained 0.6% below its pre-pandemic level in 2Q2019.
Higher growth
Despite the strong headline number, growth was uneven across the sectors, with domestic-oriented services seeing an uptick in activity. A sharp push came from the 106.2% y-o-y expansion logged by the construction sector, thanks to an increase in works from both the public and private sectors and the low-base effects since most domestic construction activities were suspended in the previous year.
This performance is also a sharp turnaround from the 23.2% y-o-y contraction in the previous quarter. In absolute terms, the value-add of the sector remained 29% below its pre-pandemic level in 2Q2019.
The retail numbers, similarly, had a low base to jump from. For 2Q2021, this sector was up 50.7% y-o-y, a significant jump from the 1.6% y-o-y growth in the previous quarter. This was supported by higher motor vehicle and non-motor vehicle sales volumes, largely due to the low base in the previous year.
Still, in absolute terms, the value-add of the sector remained 12% below its pre-pandemic level.
The F&B sector similarly saw growth jump by 36.7% y-o-y, reversing from the previous quarter’s 9.2% y-o-y contraction. This was supported by greater sales volumes at restaurants, cafes, food courts, fast-food joints and other eating places, due to last year’s low base.
Food caterers, however, continued to be adversely affected by restrictions on large-scale events and gatherings. On the whole, the value-add of the sector remained 26% below its pre-Covid level.
The transport and storage sector likewise grew by 20.9% y-o-y, logging a turnaround from the previous quarter’s 15.8% contraction. Within the sector, the air transport and land transport segments expanded strongly from a low base in 2Q2020, while the water transport segment grew in tandem with an increase in total sea cargo handled and container throughput. Overall, the sector’s value-add remained 24% lower than its pre-Covid level.
Over in the real estate sector, growth was up by 25.8% y-o-y, a reversal from the previous quarter’s 3.1% y-o-y contraction. While this comes on the back of the previous year’s low base, it is still 7.4% lower than pre-pandemic levels in terms of value-add.
In line with this, the accommodation sector expanded by 13.2% y-o-y, easing from the previous month’s 16.3% y-o-y growth. The value-add for the sector remained 27% lower than pre-pandemic level, as growth was supported by government and domestic tourism demand despite the weak international visitor arrivals.
Several other sectors such as information & communications, finance & insurance and professional services also recorded expansion in 2Q2021. The information & communications sector, for one, grew by 9.6% y-o-y, a step-up from the previous quarter’s 6.8% y-o-y rise that came from robust enterprise and consumer demand for digital solutions & services, and games & software publishing activities.
The finance & insurance sector expanded by 9.1% y-o-y, higher than the previous quarter’s 5.7% y-o-y growth rate. Strong support came from the banking segment, which grew due to the continued increase in net fees and commissions and interest income from loans. The insurance segment likewise expanded strongly, reflecting the sustained demand for life insurance products.
The growth streak extended to the professional services sector which expanded by 9.4% y-o-y — a reversal from its 4.5% y-o-y contraction in the previous quarter. This follows growth in segments like architectural & engineering, technical testing & analysis and other professional, scientific & technical services segments, due to the low base in 2Q2020 during which most domestic construction activities were suspended and workplace restrictions were in place.
The other services industries segment was also in the black with a 15.8% y-o-y jump, a sharp improvement from the 0.5% growth posted in 1Q2021. This comes as the arts, entertainment & recreation and health & social services segments had some activity — a complete reversal from the status in 2Q2020. However, the sector remained 5.0% below its pre-Covid level.
Conversely, the administrative & support services sector contracted by 1.3% y-o-y, making this the only domestic-oriented sector to record a decline in 2Q2021. MTI attributes this to a shrinkage in the rental & leasing segment as travel restrictions affected the rental and leasing of air transport equipment. This, however, was “more than offset” by expansion in other administrative & support services segments, says MTI.
Meanwhile, the external-facing sectors saw healthy growth in 2Q2021, as manufacturing posted a 17.7% y-o-y expansion. This is an extension of the 11.4% growth recorded in the previous quarter and follows expansion across all clusters. In absolute value-add terms, the sector was however 29% below its pre-pandemic level in 2Q2019.
Taking into account the GDP performance in 1Q2021, the Singapore economy expanded by 7.7% y-o-y for the first half of the year. MTI’s Lim cautions that the recovery of various sectors is likely to remain uneven for the rest of the year.
Outward-oriented sectors like manufacturing and wholesale trade are expected to stay strong amid a rebound in global demand. Consumer-facing sectors like retail, F&B, construction and marine & offshore engineering are seen to have some recovery as the restrictions ease and the sectors leverage 2020’s low base.
While the manufacturing sector is expected to stay in expansion, current shortages of semiconductor chips may put a lid on the pace of electronics growth even though global demand remains strong, mulls DBS senior economist Irvin Seah.
On the other hand, tourism and aviation-related sectors are projected to recover more slowly than expected with global travel demand slated to remain sluggish, says Lim.
Forecasts maintained
When Singapore unexpectedly retrograded into the so-called Phase Two (Heightened Alert) between July 22 and Aug 10 to the dismay of business owners, there was a palpable sense that the growth momentum would stall — symbolised by eateries stacking up their chairs and tables since dining-in was again banned. As such, several economists also contemplated revising their forecast for full-year growth.
Now, following the 2Q2021 expansion, those concerns have been put behind. Selena Ling, head of treasury research and strategy at OCBC Bank, says “it did not come as a surprise that MTI upgraded the full-year forecast”. She is maintaining her 6.7% growth target for 2021, and looking at more normalised growth of 2% to 4% in 2022.
“A faster pace of reopening and relaxation of restriction measures and potential resumption of some international travel later this year would pave the way for a more stable recovery trajectory and hence room for policy normalisation down the road,” explains Ling.
UOB economist Barnabas Gan, like Ling, is maintaining his full-year forecast at 6.5%, amid what he calls a “resilient economic prognosis”. This is as the vaccination take-up rate is strong and complements the healthy performance of the export and manufacturing sectors.
Joining Gan and Ling are Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye, who are also maintaining their expectations of a 6.8% full-year growth. The duo acknowledge that this is a tad above the mid-point of MTI’s forecast range and say it follows expectations that the services and construction sectors will recover more strongly with the easing of lockdowns and border controls.
DBS’ Seah, who is maintaining his full-year growth forecast of 6.3%, chimes in, saying that “a combination of growth normalisation in manufacturing, manpower crunch in construction, and continued drag from Covid on tourism-related sectors will make for a slower second half of the year”.
Against this backdrop, the economists predict that the Monetary Authority of Singapore (MAS) will stand pat on their policy stance in their half-yearly announcement come October. BofA Securities economist Mohammad Faiz Nagutha, for one, reckons that the policy stance is “appropriate for now”. He adds that the central bank will likely drop its “accommodative stance” in October before formally tightening the policy settings next April.
This two-step process to the start of policy normalisation is similar to what happened prior to the 2018 tightening cycle, when forward guidance on the appropriateness of the “neutral policy stance” was first removed in October 2017 before the policy slope was adjusted (from 0% to 0.5% in his view) in April 2018, explains Nagutha.
Ling agrees that the upcoming announcement by the central bank will “lay the groundwork for a recalibration of policy settings in 2022, given that the Singapore economy should have recovered to pre-pandemic levels by then”.
Such a stance has been adopted by several major central banks such as the Bank of Korea, Royal Bank of New Zealand, Bank of England and the US Federal Reserve. Each of them has begun articulating the possibility of a tapering or more hawkish rate hikes between 2022 and 2023.
Even so, the economists say that a wait-and-see approach is ideal for now, given the raging pandemic and the uncertainty of its impact on the economy, both in Singapore and abroad.
Cover image: Albert Chua/The Edge Singapore
