Singapore Outlook 2023: Soft patch ahead

We expect Singapore’s economic growth momentum to slow further in 2023, and a technical recession within the next three quarters should not be discounted.
Group Research29 Nov 2022
  • Inflation will remain high while growth momentum is slowing
  • Monetary policy would have to balance the changing risk dynamics between growth and inflation
  • USD/SGD to consolidate in a 1.36-1.40 range in 2023
  • We expect SORA to stabilize around 3.58% in 2023, assuming non-stress market conditions
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The economy started 2022 on a high note on the back of a solid showing in the previous year, rising vaccination and further easing of COVID measures. However, a slowdown in China, a pick-up in inflationary pressure with the resulting tighter monetary policies and the Ukraine war have dampened economic performance. Optimism at the start of the year soon faded and risk aversion set in.

Manufacturing has turned from a key driver to a drag. Growth momentum in the sector is waning due to China’s slowdown, a decline in global electronics demand, and tighter liquidity conditions. China’s unwinding in COVID measures in 2023 will be pivotal, but rhetoric is still hawkish. A gradual and calibrated approach in the normalisation process can be expected in the coming quarters. If further easing of China’s COVID measures pans out, the pent-up demand could be significant for the region. That said, China’s COVID policy is a wild card, and we prefer to take a cautious view for now given the high degree of uncertainty.

While recovery in the services sector has thus far been encouraging, its sustainability is in doubt. Firstly, the existing manpower crunch would put a lid on the near-term prospects of the cluster. The externally oriented services such as shipping, wholesale trade, and financial services could potentially be weighed down by a weaker global demand, higher risk premiums and margin erosion. Without the fresh influx of Chinese tourists, the reopening impetus will start to wane. A weaker employment outlook will also weigh on the domestic service sector. Expect some signs of weakness in the services sector to emerge by mid-2023.

Economic growth momentum will slow further in 2023. Growth in the fourth quarter could potentially fall below 2% YoY with risk of another sequential decline due to further drag from the manufacturing sector. Latest Oct 2022 non-oil domestic exports (NODX) figures are a good bellwether. The headline number dipped into the red (-5.6% YoY) for the first time in almost two years, dragged by poor electronics export sales (-9.3%) and a deep 32% decline in exports to China. We expect growth performance to slow to 2.2% in 2023, and a technical recession within the next three quarters should not be discounted.

After five rounds of tightening by the Monetary Authority of Singapore (MAS), and visible signs of global inflationary pressure abating, price pressure within Singapore appears to be easing. Consumer Price Index (CPI) inflation has peaked, with the latest October reading dipping to 6.7%. Going forward, while base effect and the knock-on impact of slower growth on demand and the labour market could make for lower inflation reading, a 1%-pt hike in the Goods and Services Tax (GST) to 8% in Jan 2023, will offset the trajectory of inflation readings for the full year. We expect headline CPI inflation to average 6.3% in 2023, with core inflation for the full year likely to come in at 4.2%.

Importantly, exchange rate appreciation alone cannot be the panacea. With risk on growth rising, MAS will become more data-dependent in future policy decisions.

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Note: All views expressed are current as at the stated date of publication.

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