3 Jan 2022

Janice Heng

SINGAPORE’S economic recovery ended 2021 on a stronger-than-expected note, stoking optimism among private sector economists – though most are sticking to their forecasts for 2022, for now.

In the year ahead, high vaccination rates should support further reopening and lessen the risk of disruptive restrictions, while the recovery broadens across the services sectors, said economists.

Gross domestic product (GDP) grew 5.9 per cent year on year in the fourth quarter, according to advance estimates from the Ministry of Trade and Industry (MTI) on Monday (Jan 3).

This brought full-year growth to 7.2 per cent, on the higher side of the official full-year growth forecast of “around 7 per cent”.

This was the fastest full-year growth since 2010’s record 14.5 per cent. But just as 2010’s growth came after a mild contraction the year before, the 2021 figure marks a rebound from 2020’s record 5.4 per cent contraction, which had been Singapore’s worst recession since independence.

HSBC economist Yun Liu noted, however, that the strong performance “is not only due to base effects”. Singapore’s GDP level had returned pre-pandemic levels in Q3, and the latest figures mean that full-year output has exceeded the 2019 level by 1.4 per cent.

The Q4 growth figure represented a moderation from the revised figure of 7.1 per cent growth in the previous quarter, but was better than economists’ expectations of 5.1 per cent growth.

On a quarter-on-quarter seasonally-adjusted basis, the economy grew 2.6 per cent in Q4, better than economists’ expectations of 2.1 per cent growth and faster than the 1.2 per cent growth in Q3.

Barclays economist Brian Tan said: “With the economy ending the year on notably more solid footing than expected, we raise our 2022 GDP growth forecast to 5.5 per cent from 5.0 per cent.”

This is above the official 2022 full-year forecast of 3 to 5 per cent growth.

Slower growth in 2022 still “represents a solid economic recovery, as the strength of 2021 GDP growth was exaggerated by the outsized base effects arising from the initial impact of the pandemic in 2020”, said Tan.

Most other economists kept to existing estimates, though noting upside risks. With the strong Q4 momentum “raising the starting point for 2022”, Citi economist Kit Wei Zheng noted upside risks – “likely closer to 5 per cent” – to Citi’s current 4 per cent forecast.

UOB economist Barnabas Gan said that the 2022 outlook “remains optimistic, especially given the strong end to 2021 as seen in today’s data”, but stuck to his forecast of 3.5 per cent.

“Despite the relatively high base data seen in 2021, Singapore’s economy is expected to stay underpinned by the favourable export and manufacturing sectors,” he said.

Manufacturing remained the star sector in Q4, growing 14 per cent year on year in an acceleration from Q3’s 7.9 per cent growth. This was supported by output expansions in all clusters, with particularly strong growth in the electronics and precision engineering clusters due to sustained global demand for semiconductors and semiconductor equipment respectively.

On a quarter-on-quarter seasonally-adjusted basis, the manufacturing sector grew 4.2 per cent, up from 0.2 per cent in the third quarter.

The latest quarter’s figures take full-year manufacturing growth to 12.8 per cent. However, this pace is expected to moderate in 2022.

“Besides capacity constraints and the high base this year, the growth slowdown in China could potentially weigh on the performance of this sector going forward,” said DBS senior economist Irvin Seah.

He sees China as “the key risk to watch” for overall growth, as China’s performance “will have deep implications on the prospects for the manufacturing sector, which thus far has been the main engine of the recovery”.

OCBC chief economist and head of treasury research and strategy Selena Ling expects the manufacturing sector’s year-on-year growth to slow down to 4 to 5 per cent in 2022, as global supply chain bottlenecks may persist in the first half of this year.

Constrained by labour shortages amid border restrictions, the construction sector grew 2 per cent in Q4, slowing from the 66.3 per cent growth in Q3, which had been due to a low base effect in the year-ago period.

In absolute terms, the construction sector’s value-added remained 26 per cent below its pre-Covid level in the fourth quarter of 2019. On a quarter-on-quarter seasonally-adjusted basis, the sector contracted 4.4 per cent in Q4, reversing from Q3’s 4.9 per cent growth.

Besides manpower costs, rising prices for commodities and construction materials could take a toll on margins and the pace of recovery in the coming quarters, said DBS’s Seah.

The services sector grew 4.6 per cent overall. The strongest growth was by the information and communications, finance and insurance, and professional services group, which grew 6 per cent, though this was a moderation from the previous quarter’s 8 per cent growth.

All sectors in this group saw expansion. Information and communications continued to benefit from strong demand for IT and digital solutions, as well as robust games and software publishing activities, while the finance and insurance sector was bolstered in part by fund management activities.

On a quarter-on-quarter seasonally-adjusted basis, the sectors in the group grew 3.1 per cent in Q4, faster than the 1.5 per cent growth in Q3.

The wholesale and retail trade and transportation and storage sectors grew by 4.3 per cent, extending the 6.1 per cent growth in the third quarter.

Within this group, the wholesale trade sector saw steady growth, in tandem with Singapore’s robust merchandise exports performance, said MTI. But growth in the transportation and storage sector was partly due to low base effects.

The remaining group of services sectors – accommodation and food services, real estate, administrative and support services, and other services – grew 3.1 per cent, extending the 3.8 per cent growth in the previous quarter.

All sectors in this final group saw expansion, except for the accommodation and food services sector, with MTI attributing this primarily to ongoing travel restrictions, as well as tighter domestic restrictions on dining-in group sizes compared to the year-ago period.

Overall, the value-added of the sectors in this group stayed 7.1 per cent below the pre-Covid level in Q4 2019. But on a quarter-on-quarter seasonally-adjusted basis, they expanded by 4.9 per cent in Q4 2021, improving from the 1.5 per cent growth in Q3.

“While the recovery in the services sector has thus far been uneven, a more broad-based improvement is on the cards,” said Seah.

Although headline services growth slowed in Q4, it is “encouraging” that seasonally-adjusted sequential growth improved to 2.5 per cent, up from 1.1 per cent before, he added.

Sustained services growth in the first half of 2022 will depend on border reopenings and additional Vaccinated Travel Lanes to boost the hospitality sector, said OCBC’s Ling.

Separate figures for the sectors within each group were not provided in the advance estimates.

The advance estimates are computed mainly from data from the first 2 months of the quarter, October and November. Revised preliminary estimates based on more data will be released in February.

Maybank Research analysts Chua Hak Bin and Lee Ju Ye expect a small upgrade in the services sector in the February estimate, bringing headline Q4 growth to slightly above 6 per cent and full-year growth to 7.3 per cent.

In particular, the wholesale and retail trade sector may come in higher than advance estimates, given the robust performance in non-oil re-exports and retail sales, they added.

Human traffic to retail and recreation venues improved in December to around 5 per cent below pre-pandemic levels, despite concerns about the Omicron variant, they noted.

Higher vaccination rates and a less severe Omicron wave could make for a faster reopening of regional borders, and aid regional economies in resuming trend growth in 2022, said Ling.

The downside risks ahead are external headwinds, such as global monetary policy tightening, China’s growth slowdown, and possible new Covid-19 variants, she said.

Barclays’ Tan sees Singapore as still likely to lag North Asia in its recovery, but perform relatively well compared with the rest of South-east Asia.

“Even if renewed waves of infections force the government to tighten social distancing measures again, widespread vaccination coverage should reduce the need for severe restrictions,” he said.

With recent restrictions also having been more calibrated to limit economic disruption, “this should help the government to stay on course to manage a gradual revival of international travel activity”.

“Despite the slower pace, the quality of growth will improve,” said Seah, whose growth forecast for 2022 is 3.5 per cent. As reopening continues, “contributions to GDP growth from the various sectors will become less lopsided, and the recovery will become more broad-based”.