Amid a weak manufacturing sector, Singapore’s GDP this year will have to be supported by the recovery of the consumer and services sectors
Some economists prefer analysing hard data while others like Song Seng Wun combine their passion for food and drinks with their curiosity to understand the economy. He meets and talks to business owners and workers to feel the economy’s pulse firsthand.
Song regularly updates his widely-followed Facebook with foodie adventures, showcasing his love for dishes like nasi lemak from Bukit Canberra Hawker Centre and gula apong from the Seroja, known for its set menu costing over $200 per head and winning a Michelin star just eight months into the business.
Recently retired from CIMB, Song contributes to Singapore’s F&B industry, which grew 12.2% y-o-y in 1Q2023, which moderated from the 19.6% y-o-y growth rate in 4Q2022. Meanwhile, the accommodation sector still posted strong growth in 1Q2023 at 21.9% y-o-y.
In contrast, Singapore’s other key economic pillar, the export-oriented manufacturing sector, is set to continue the downward trend in line with a weaker global environment. In 1Q2023, this sector extended its ongoing decline with a 5.6% y-o-y contraction. This was steeper than the 2.6% y-o-y fall in the preceding 4Q2022.
To recap, Singapore’s 1Q2023 GDP came in only at 0.4% y-o-y. In its 1Q2023 economic survey, the Ministry of Trade and Industry (MTI) warns that the electronics downcycle is likely to be deeper and more prolonged than earlier projected, no thanks to a weaker global environment. Says the ministry: “The manufacturing sector is projected to see a deeper downturn, led by output contractions in the electronics and precision engineering clusters in tandem with weaker global semiconductor demand, as well as the chemicals cluster due to sluggish demand from China.” MTI expects Singapore’s 2023 GDP to grow at between 0.5% and 2.5%.
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In June, non-oil domestic exports (NODX), with electronics, chemicals and pharmaceuticals as the key components, dropped 15.5% y-o-y, marking its ninth straight month of contraction. UOB economist Alvin Liew says: “Overall, the export outlook remains troubled, and we continue to expect more pronounced y-o-y NODX contractions for a few more months before improving in the later part of 2H2023.”
Liew expects NODX to contract by 10% for the whole of 2023. RHB Bank Singapore’s Barnabas Gan similarly expects the contraction to persist in 3Q2023 before a recovery in 4Q2023. Gan says: “We keep our full-year NODX growth forecast at –8%.” He sees evidence that the momentum is improving for the trade and manufacturing sector.
All eyes on 4Q
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Will the services sector be able to support Singapore’s GDP amid the slump in manufacturing? Song, who now describes himself as an independent economist, says that much will depend on the regional consumer and business confidence in the coming months. He asks: “Will labour market conditions in Singapore’s key markets remain supportive of consumer spending even as the lagged effects of tightened monetary policies in many key economies, especially developed markets, start to bite?”
There are some signs of a shift. Song expects the NODX slump to bottom out in 3Q2023 because of the less demanding base a year ago as the NODX decline started only in October last year. “But we will need to gauge the state of consumer and business confidence at the start of 4Q2023. Will factories worldwide get busier due to year-end festive orders or not? I will monitor business orders in purchasing managers’ index reports in the coming months. The outlook is somewhat uncertain.” says Song, referring to the PMI, a key gauge of manufacturing activity.
Would the services sector be able to continue its relatively upbeat path and enjoy the ongoing broad-based growth? Song believes the key lies in consumer confidence. At the end of the day, each economic sector does not function in isolation but spills over and impacts one another. Song thinks it will be helpful if the drag from manufacturing lessens in the coming quarters. “We need the year-long manufacturing recession to end,” he says.
The growth contributed by the services sector has been similarly observed by Maybank economists Chua Hak Bin and Brian Lee. They note that Singapore avoided a technical recession in 2Q2023, with GDP growth firming to +0.7% from a year ago, compared to +0.4% in 1Q2023 while expanding +0.3% on a q-o-q seasonally-adjusted basis, compared to –0.4% in 1Q2023. “Growth exceeded our expectations (–0.8%) due to stronger than expected services growth (+3%), especially for the wholesale and retail trade and transportation and storage sectors,” note Chua and Lee.
Growth was mainly driven by the accommodation and food services, real estate, admin and support services and other services sectors (+6.1%), albeit easing from +7.1% in 1Q2023. In particular, the accommodation sector recovered strongly, with visitor arrivals rising to 3.4 million in 2Q2023 or 72.7% of pre-pandemic levels. China tourist arrivals recovered to 42.6% of pre-pandemic levels in June.
Amid slowing real retail sales on an m-o-m basis in May, Chua and Lee add: “Services may remain supported by consumer-facing segments with the recovery in visitor arrivals, particularly in tourism-sensitive industries like accommodation and F&B. Nonetheless, we expect services growth to ease with fading reopening tailwinds and slowing visitor arrivals momentum.”
Class acts in town
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Tourism is making a strong comeback in Singapore, with big-name concerts like Taylor Swift and Coldplay attracting many overseas fans. Currently, the tourism sector contributes about 4% of Singapore’s GDP.
While this is a much smaller portion than the manufacturing sector, which contributes 20% to GDP, 2023 seems to be the year the tourism industry could help support GDP growth. Visitor arrivals in Singapore in 1H2023 have yet to return to pre-pandemic levels but it is recovering. According to data from RHB Bank Singapore, visitor arrivals in 1H2023 were at 67% of pre-pandemic levels at 6.3 million, equivalent to 2022’s full-year numbers. Singapore’s visitor arrivals were propelled by the key markets of Indonesia (18%), India (11%) and Malaysia (8%).
Data from the Singapore Tourism Board (STB) showed that June saw 1.13 million international visitor arrivals, exceeding the one-million mark for the fourth consecutive month and recovering from May’s slight dip (1.11 million). It also more than doubled from the 543,733 visitors recorded in the same period a year ago.
While Indonesia and India remained the top two arrivals in June, China took the third spot as visitors gradually resume their travel plans and visit the city-state. This represents 42.6% of pre-pandemic levels, higher than the 33.7% in May.
RHB’s Gan is surprised by the unexpectedly strong growth of 3% in the services sector in 2Q2023 as tourism arrivals appeared to have plateaued in April after May’s surprising contraction of 1.4% m-o-m. However, he believes that support from tourism demand should lift retail sales, albeit limited given China’s cautious prognosis.
With more events and festivals in 2H2023, Gan expects a seasonally better half for the services sector and believes that consumer discretionary spending will outperform essential spending in 2H2023. This might result in an uplift in sales in the motor vehicles and luxury segments. He also notes that there may be some pent-up shopping at the end of the year as shoppers brace themselves for the GST hike next year — a similar trend that was seen last year.
Gan sees three key catalysts that will improve Singapore’s growth momentum in 2H2023. Firstly, he expects risk appetite to continue to recover on the back of near-peak rates in developed markets, with markets likely pricing in some rate cuts into 2024. Secondly, the higher tourism levels on a y-o-y perspective and the resiliency of the overall services sector should continue to support Singapore’s growth. Thirdly, recent high-frequency data, such as trade and industrial production, have seen a recovery in momentum in 2Q2023, and this could be sustained in 2H2023.
Says Gan: “Separately, given the surprisingly strong GDP print in 2Q2023, it reinforces our view for the Monetary Authority of Singapore (MAS) to keep its policy parameters unchanged in October.” He believes that “growth will be firing on all cylinders” from 4Q2023 going into 2024 as the manufacturing and trade sector will likely see some recovery then. With Mice (meetings, incentives, conferences and exhibitions) events also returning and large concert events in the lineup, Singapore’s tourism sector is bound to enjoy further growth.
Stocks to watch
The consumer and services sector’s recovery is expected to boost various industries like hospitality, retail, F&B, healthcare and nightlife. Both economists and analysts are optimistic about the economic prospects and have identified some stocks for investors to monitor.
Based on investment themes identified in 2H2023, some large-cap stocks picked by RHB Bank Singapore’s head of equity research Shekhar Jaiswal include CapitaLand Ascendas REIT, Singapore Telecommunications, ST Engineering, Thai Beverage and United Overseas Bank. Some small- and mid-cap picks include Centurion, ComfortDelGro, ESR-LOGOS REIT, Food Empire, Marco Polo Marine, Raffles Medical Group (RMG) and Sheng Siong.
For Thilan Wickramasinghe, head of equity research at Maybank Securities, some of his key picks are CDL Hospitality Trusts, which could benefit from inbound travel into Singapore; Frasers Centrepoint Trust from continued retail growth, especially in the suburbs; RMG from increasing medical tourism; and Genting Singapore which should see improved gaming and non-gaming revenues from increasing arrivals.
A complete post-pandemic recovery is likely by 2024, says Caesar Indra, president of travel platform Traveloka. “There’s no doubt that Singapore is renowned internationally for being a world-class city that offers travellers unique experiences. Singapore hosts many of the business world’s top exhibitions, conferences and marquee events such as the Formula 1 Singapore Grand Prix. Several Mice events, including the Milken Asia Summit, are timed around the Formula One race. Our data reflects over 50% increase in international arrivals during the F1 week compared to the previous week.”
With concert tourism also rising and a highlight reel of world-class performers lined up for multiple shows in Singapore, Indra sees this as an “incredible win” for Singapore’s tourism industry and cements its status as a key leisure travel destination.
“Not only are local businesses, including hotels and F&B establishments, expected to thrive as a result of these tours but ancillary services such as banking and transportation also stand to gain due to incidental spending of tourists during their time in Singapore. Furthermore, Singapore continues to enjoy strong demand for domestic tourism through local attractions and hotels as staycations, which contributes significantly to economic growth as well,” he adds.
