THE SINGAPORE ECONOMY: CYCLICAL RESILIENCE AND STRUCTURAL POSITIVES

The Singapore economy has been on a roll this year, registering reasonably vibrant growth despite the increasingly difficult global environment. Its currency has also been relatively firm even in the face of rampant US Dollar strength. The key question now is whether it can maintain this resilience given the challenges created by the sombre outlook for the world economy next year. Specifically, Singapore has to deal with much weaker external demand as the global economy wilts under the pressure of geo-political uncertainty, sharply higher interest rates and an energy price shock. 

Our view is that effective policy intervention will help keep Singapore on an even track. A second factor helping Singapore is the structural positives which have enhanced Singapore’s position as one of the world’s pre-eminent centres of commerce and finance.

1. The starting point – where does Singapore stand currently?

The Singapore economy has been growing this year after beginning a rebound in 2021 from the pandemic-induced contraction. However, as the world economy entered turbulent waters, the local economy has also been hurt.

2. The global environment is turning more hostile for Singapore but it is not entirely bad

Our assumptions for the global economy in 2023 are set out below. In essence, it will be a difficult period for Singapore but there are also a number of potentially offsetting positives.

• First, we expect geo-political risks to continue generating uncertainty and occasional episodes of stress for businesses and investors. Nevertheless, our assumption is that hot spots such as the Ukraine war stabilise at a level that does not produce more shocks to the global economy of the magnitude seen this year. We believe that the US and China, while remaining locked in intense competition, will establish mechanisms to ensure that frictions do not escalate into outright conflict. The geo-political environment will not be pleasant but it is unlikely to wreak serious damage on global economic activity.
• Second, we expect global monetary tightening to reach a peak in early 2023. By then we see global inflation subsiding. A key reason for this is that we expect oil prices to ease after the first quarter of 2023 as demand weakens and supply improves.
• Third, we will assume that a major downside to the global economy – financial dislocations – can be contained. The risks of such dislocation are higher now as seen in the extraordinarily violent market reactions to recent instances of bad news such as the mismanaged budget that the UK introduced or the knee-jerk exodus of capital out of Chinese stocks following the completion of the Chinese Communist Party’s 20^th Party Congress.
• Fourth, in the US, we see economic activity slowing in response to higher interest rates but the massive pile of household savings and a tight labour market are likely to help it avoid a full-blown recession.
• Fifth, the outlook for demand in the electronics sector is important as the sector contributes a large part of Singapore’s industrial production and exports. Our assumption is that there will be a shallow recession in global electronics which will turn around in mid-2023.
• Finally, China is the biggest risk in the global economy. Its economy is weakening as the government’s rigid pandemic management restrictions hurt confidence and demand. We assume that more stimulus will be added to the economy and pandemic rules are gradually eased.

It is important to note that this cycle differs from previous ones. The critical difference is that the bounce back from pandemic provides a continuing boost to growth. As restrictions are eased and as the covid virus evolves into more benign forms, pent-up demand is being released while the return of tourism is of particular benefit to Singapore’s neighbours such as Malaysia and Thailand. 

The bottom line for Singapore: being one of the most open economies in the world, slower global export demand and more financial turbulence will create strong headwinds. But our scenario for the world economy is not a dire one, with American resilience, Chinese policy intervention and falling oil prices providing some buffers.

3. The continuing rebound from the pandemic and policy intervention will help

There are a number of factors related to the recovery from the pandemic that will help Singapore weather the difficulties ahead:

• First, there remains considerable scope for a bounce-back in sectors that are still operating below pre-Covid levels. Tourist arrivals are, for example, still 50% below pre-pandemic levels, as of Sep 22, and are recovering well. The construction sector is benefiting from the return of foreign workers, the lack of which had kept the industry below pre-covid levels. Tourism recovery will allow continued growth in the retail, F&B and transportation sectors. Transport engineering will benefit as the easing of global travel restrictions drive demand for aircraft parts and MRO (maintenance, repair, and operations) activities.
• Second, the recovery in regional economies will contribute to growth in domestic sectors such as wholesale trade, reflecting Singapore’s role as the regional entrepot.
• Third, the job market is extremely tight. That means jobs are still easy to get and wages are rising – supporting domestic demand.

Another set of factors helping to keep the Singapore economy on an even keel is policy intervention:

• The government has stepped in to provide support for the household sector – but in a careful and judicious manner. Just last month a SGD1.5 billion fiscal package was announced under which lower-income households would be provided with handouts to help them cope with higher prices. Basically, the government’s extraordinarily strong fiscal position provides it with the firepower to boost the economy if required – virtually no other economy has this fiscal power. There is a fair chance that the government will want to call an early general election in 2023 – that would give an added incentive for the leadership to provide economic support.
• While inflation has risen, the Monetary Authority of Singapore has been pro-active in tackling that spike in prices. It has tightened monetary policy in its unique way of allowing a faster appreciation of the trade-weighted value of the Singapore Dollar. This will help cool demand and slow price increases.
• Government agencies have also brought in measures to cool the property sector, where there are signs of over-heating.

4. Structural bright spots continue to emerge in the economy

The Singapore economy is also buffered by a number of longer term secular drivers:

• First, its finance sector has enjoyed a rush of wealth management activity into Singapore. This partly reflects the travails its competitor, Hong Kong, has suffered due to the political changes there. But it also is the product of savvy and innovative policy making at home. For instance, the introduction of the variable capital company legal structure was welcomed by the wealth management industry. As a consequence the number of family offices in Singapore has doubled in the past year.
• Second, the Economic Development Board (EDB) has been remarkably successful in attracting very large investments in high-value areas in manufacturing. Much of this has been in electronics but there are new growth sectors emerging such as electric vehicles. The bio-medical and chemicals sectors also continue to expand. EDB has also secured newly announced research and development centres to be built in Singapore.

• Third, the infocomm sector is enjoying secular growth driven by technology trends like digitalization, automation and data analytics.

Conclusion: the outlook

• Thus we see the economy slowing from around 3.5% growth this year to around 2.5% in 2023.
• However, inflation will remain a challenge. Although global inflation will cool, the government is going ahead with the hike in the goods & services tax rate of 2 percentage points. That will cause inflation to rise from 6% in 2022 to 6.5% in 2023.
• The current account surplus will remain huge at around 16% of GDP next year, edging down a little from 17.5% of GDP in 2022.
• The Singapore Dollar will strengthen against the US Dollar, rising from a likely SGD1.38/USD at the end of this year to SGD 1.30 at the end of 2023.