Singapore: Strong 2Q but normalisation ahead
- Advance GDP estimates for 2Q21 came in at 14.3% YoY and -2.0% QoQ sa
- This was in line with DBS’s expectation of 14.2% YoY and -2.1% QoQ sa
- Implication for our forecast – On track to meet our growth forecast of 6.3% for 2021
- Implications for investors – Risk of monetary policy normalisation ahead
The Singapore economy is projected to clock a strong performance in the second quarter based on the advance GDP estimates. The official figures point to a robust expansion of 14.3% YoY (-2.0% QoQ sa) in the quarter, much in line with DBS’s forecasts of 14.2% YoY (-2.1% QoQ sa). The strong YoY headline growth is largely the result of the low base last year due to the Circuit Breaker, while the sequential decline can be attributed to the implementation of the Phase Two Heightened Alert (P2HA) measures in May-June to contain the spread of COVID in recent months.
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, and considerably less severe compared to the Circuit Breaker last year. 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.
While the manufacturing sector remains in the driving seat, the story beneath the strong showing is that there are emerging signs of slower growth pace ahead. Despite a projected 18.5% YoY expansion, a mild decline of 1.8% has been factored into the official estimation. This confirms our long-held belief that while the sector will largely remain in expansion mode in the coming quarter, momentum is easing. Existing shortages of semiconductor chips will put a lid on the pace of expansion in the electronics cluster even though global demand for high end electronics parts and components remains strong Moreover, the moderation in the biomedical sector growth is also due to the high base last year.
Though outlook for the construction sector is improving, its supply-side constraints are worsening. The sharp upturn of 98.8% YoY is largely due to low base. In contrast, the sequential decline of 11% sa is reflecting the manpower crunch within this sector. 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.
Despite the strong showing (9.8% YoY) in the services sector, outlook for the sector is far from being hunky-dory. 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 has been manifested in the 2Q21 GDP figures, with the overall sector dipping by 1.0% QoQ sa in the quarter. Moreover, tourism related industries such as aviation and accommodation remain weighed down by the ongoing COVID situation, particularly with the severe infection rate in many of the key tourism markets in the region (e.g., Indonesia, Malaysia and Thailand). Indeed, outlook for these industries remains cloudy. It is unlikely that the real GDP (in level terms) of these sectors will return to pre-COVID levels within this year despite rising hope of border reopening.
Slower growth ahead
Economic normalisation is underway. The sequential pullback reported in today’s advance estimates is well in line with our expectation (refer to DBS report “Singapore: Towards mass vaccination and economic recovery” dated 15 Jun21 for more details). GDP 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. A combination of slower growth momentum 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.
There are signs of rising inflation. 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 builds 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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