Singapore: A strong last lap in 2021

The Singapore economy ended 2021 on a high note, with stronger than expected GDP growth in 4Q21.
Irvin Seah03 Jan 2022
  • Advance GDP growth for 4Q21 came in stronger-than-expected at 5.9% YoY and 2.6% QoQ sa
  • High vaccination rate will prompt further economic reopening
  • Implications for our forecast – Our full year growth forecast for 2022 remains at 3.5%
  • Implications for investors – MAS may tighten monetary policy again in April
Photo credit: Unsplash

Singapore’s economic recovery from the pandemic is on track. Advance GDP growth for 4Q21 registered 5.9% YoY. Though this is lower from 7.1% in the previous quarter, the moderation comes on the back of a higher base in the same period last year. Note Singapore’s economic momentum started improving from 3Q20 and gained speed in the fourth quarter last year. In fact, today’s set of figures has turned out to be a tad stronger than expected, bringing the full-year 2021 GDP growth to 7.2%, slightly higher than our previous forecast of 7.0%.

On the margin, the economy recorded a strong showing of 2.6% QoQ sa, up from 1.2% in 3Q. Easing of domestic safe measures, henceforth allowing more economic activities to resume is certainly a key factor. And such impetus is expected to continue in 2022 despite emerging concerns of more infections from the new Omicron variant. A high vaccination rate (approx. 90%) will put the economy firmly on the reopening path in 2022.

The manufacturing sector continues to remain in the driving seat. Growth in the sector has picked up to 14% YoY (4.2% QoQ sa), after a more modest pace in the third quarter. Strong export sales in electronics and petrochemical in the last few months have helped to power the production output in the broader sector. However, growth could potentially moderate in the months ahead. 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.

Labour crunch remains the biggest challenge for the construction sector. Growth in this sector slowed drastically to 2.0% YoY, down from 66.3% in 4Q21. Sequentially, momentum reversed by 4.4% QoQ sa, reflecting the manpower crunch within this sector even though the project pipeline remains strong. Existing border control measures will continue to weigh down on the performance of the sector. And besides manpower costs, rising prices for commodities and construction materials could also take a toll on the margins and the pace of recovery in the sector in the coming quarters.

While the recovery in the services sector has thus far been uneven, a more broad-based improvement is on the cards. Indeed, while headline service growth has eased to 4.6% YoY, from 6.2% previously, the improvement in sequential growth to 2.5% QoQ sa, up from 1.1%, is encouraging. The high inoculation rate has prompted the further easing of safety measures and more VTLs to be established. This would prompt a speedier recovery in the services sector, especially for industries that have been worst impacted by the pandemic, i.e., hospitality, F&B, aviation and tourism-related services. In addition, externally oriented services such as shipping, wholesale trade and financial services will continue to do well, riding on overall global recovery. IT services will benefit from the increased investment in digital solutions and further adoption of new technologies. Business services will continue to leverage on the overall improvement in business sentiments, as well as a still resilient real estate activity. Overall, we believe the recovery in the services sector will become more broad-based as we head into 2022.

Growth normalisation

A high level of vaccination rate has made for the safe reopening of the economy and allowed economic activities (including travel) to resume normalcy. Besides getting eligible residents to get their booster jab, efforts are underway to inoculate residents below 12 years of age. Barring the risks of the efficacy of existing vaccines being weakened as a result of virus mutations (e.g., the new Omicron variant) or waning antibody levels, the reopening of the economy will provide renewed impetus to growth over the next 12 months. That said, economic normalisation remains at work and recovery momentum is expected to slow. China is the key risk to watch on the growth front, which will have deep implications on the prospects for the manufacturing sector, which thus far has been the main engine of the recovery.

We expect full-year GDP growth to ease to 3.5% in 2022. Despite the slower pace, the quality of growth will improve. As Singapore continues its effort to inoculate the remaining population and press forward with the reopening of the economy, particularly revitalising the struggling travel-related sector, contributions to GDP growth from the various sectors will become less lop-sided, and the recovery will become more broad-based. Simply put, one can view this moderation in growth performance as merely a reversal back to a more sustainable potential growth range of 2.5% to 3.5%.

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Irvin Seah

Economist - Singapore

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