Singapore: Towards mass vaccination and economic recovery
- Singapore is making good progress on its economic normalisation
- The impact of P2/3HA is estimated to be about SGD 764mn (0.16% of nominal GDP)
- GDP growth is expected to moderate to 4.9% in 2H, from an average of 7.8% in 1H
- Resident unemployment rate will ease gradually to 3.5% in the coming quarters
- The MAS will be on “heightened alert” if inflation readings continue to inch higher
Marginal impact on the economy from P2/3HA
The impact of P2/3HA on the overall economy is expected to be marginal. The F&B, retail, and to some extent, the real estate and professional services sector are the worst hit whereas other major clusters such as manufacturing, financial, and wholesale trade services were less affected. We estimated that the P2/3HA probably has cost the Singapore economy about SGD 764.2mn (approx. 0.16% of nominal GDP) during the 4-5 weeks period . In response, policymakers have announced a package worth SGD 800mn consisting of enhanced Jobs Support Scheme (JSS), rental support and COVID-19 Recovery Grant to help companies and individuals tide over the P2/3HA period. This will buffer the impact on the overall economy.
However, the drag from the P2/3HA juxtaposed with an inherent, albeit marginal slowdown in growth momentum suggest that the economy may post a decline of 2.1% QoQ sa in the second quarter . Yet, due to the low base arising from the Circuit Breaker last year, headline growth may still register a double-digit expansion of 14.2% YoY. And with the stronger than anticipated GDP showing in the previous quarter (1.3% YoY), economic growth in the first half of the year is now expected to average 7.8%. The economy remains well on track to meet our full year GDP growth forecast of 6.3% for 2021, but that also implies expectation for a growth slowdown in 2H21 (see later section).
Toward mass vaccination
The nationwide vaccination exercise has been progressing well. As of 7 June, more than four million doses of vaccine have been administered, with 42.8% of the population having at least one dose of the vaccine, and 32.3% being fully vaccinated. This is far ahead of many Asian economies, which puts Singapore in a good position to be one of the first countries in the region to achieve mass vaccination. At the current pace, at least 80% of the population would be fully vaccinated by 4Q21, which will be a beneficial jab in the arm for the economy, particularly in terms of the timeline for normalizing business activities (e.g., more business travels and easing entry for foreign workers).
However, policymakers would likely remain cautious in the near to medium term pertaining to border control measures. Strict protocols will remain in place and a risk-based approach will be adopted for travelers from high risk countries / regions. This stems from the experience gained in the recent wave of local infections, which was largely driven by the more transmissible B1617 variant that was first discovered in South Asia. As the COVID-19 virus may continue to mutate, a cautious stance in border control is expected.
Slower growth in the second half
While the recovery process remains intact, overall GDP growth is expected to slow to 4.9% YoY in 2H21.
Outlook for the manufacturing sector should remain sanguine although some degree of moderation can be expected. Global demand for high end electronics parts and components will remain strong due to further adoption of the 5G networks, WiFi 6, as well as continued proliferation of AI, IOT, EVs. While this will bode well for the electronics industry, existing supply side bottleneck in terms of shortages of semiconductor chips will put a lid on the pace of expansion in the near term. Moreover, moderation in the biomedical sector growth is also expected on the back of the high base last year.
Though outlook for the construction sector is improving, its supply-side constraints are worsening. Further tightening of border control measures, particularly with respect to South Asian countries, which are the key sources of manpower for the sector, will continue to weigh down on the performance of the sector in the coming months, unless new short-term measures are put in place to overcome the manpower crunch. For example, workers could potentially undergo the first phase of quarantine in the source countries before a chartered flight is used to bring them to Singapore for a second phase of quarantine. However, this would certainly lead to higher manpower costs.
Performance in the services sector has been mixed and will likely remain so in the coming months. The impact of the P2/3HA measures on F&B, retail and professional services will be manifested in the 2Q21 GDP figures (refer earlier section). That said, a pent-up domestic demand, and a broad-based improvement in business sentiments and global trade will continue to drive growth in services sectors such as retail, trade related, and financial services in the coming quarters. Although hospitality related sectors such as aviation and tourism could see a spike-up in YoY growth, it is largely on account of the low base last year. The fact is that while visitor arrivals have increased in recent months, they are largely here on work related purposes and far from the levels registered prior to the COVID pandemic. Moreover, with the possibility more infectious COVID virus variants going forward, outlook for these sectors remain cloudy. It is unlikely that the real GDP (in level terms) of these sectors will return to pre-COVID levels within this year.
Labour market to improve gradually
Employment prospects is improving. Net employment change turned positive (+6,700) for the first time in more than a year. However, the uneven pace of recovery across sectors have manifested in the labour market too. Anecdotal evidence suggests that while there are ample opportunities in some industries (e.g., financial and ICT), job prospects remained dim in others (e.g, hospitality). Against such a backdrop, we expect overall resident unemployment to fall very gradually back towards 3.5% sa in the coming quarters, down from 4.0% in 1Q21.
Yet, the biggest challenge is to convert many of the temporary jobs that have been created over the past quarters into permanent roles. Policy measures such as the SGUnited Jobs and Traineeship Programmes have been effective in creating new job opportunities but many of these positions are temporary in nature. As recovery momentum may slow in the coming months, and henceforth the impetus for job creation, there is certainly a need to sustain employment creation and wage support in the near term.
Inflation rising and MAS will be watching closely
Inflation is gradually rearing its head again. As economic recovery continues, and global monetary policies remain highly accommodative, inflation risk could be seen gradually building up. Although external inflationary pressure has remained muted in 1H21, there are emerging signs of rising inflation in some areas. Energy and commodity prices (e.g., metal), as well as some agricultural product prices are rising, leading to costlier wholesale prices and higher production / construction costs in many parts of the world. Asset inflation is also rising. Property prices in major cities have also remained resilient for most part of the pandemic period, and some are already inching higher.
CPI inflation spiked up to 2.1% YoY in Apr21, from a mere 0.2% in Jan21. The MAS CPI core inflation also rose higher to 0.6%, from 0.2% in the same period. Though this is partly due to the low base in the same period last year, inflation pass-through from external sources and the narrowing of the domestic output gap arising from economic recovery would imply higher price pressure going forward. In fact, expectation is for core inflation to rise above the one percent mark at the end of the year, and to average 1.4% in 2022, up from 0.7% this year. Note the core inflation is central to the MAS’s policy decision as it underscores the underlying fundamentals of the price dynamics within the Singapore economy.
Should inflation readings continue to trend higher, the MAS will be on “heightened alert”. Granted that the SGD NEER remains well within the upper half of the SGD policy band for now, and the authority can afford to adopt a “wait and see” approach. But as economic recovery continues and external price pressure begins to build up, risk of a pre-emptive action by the authority in October should not be discounted. Indeed, data on inflation and growth in the coming months will provide clues on where the risk will be tilting.
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