Singapore's economic growth momentum in 2023 year-to-date has slowed significantly compared with annual GDP growth of 3.6% in 2022. A key factor driving the weakness of economic growth has been contracting manufacturing output and exports.

The near-term outlook is expected to remain constrained by weak demand in several important export markets for manufactures, notably the US and European Union (EU), with the pace of recovery in mainland China also weak. The service sector economy is expected to be more resilient, boosted by the continued recovery of international tourism travel in the APAC region.

Singapore economy weakens in first half of 2023

According to the statistics for Q2 2023 GDP released by Singapore's Ministry of Trade and Industry (MTI), Singapore's GDP growth rate was 0.5% year-on-year (y/y), improving on the 0.4% y/y pace in Q1 2023, but much weaker than the 3.6% annual GDP growth rate achieved in 2022.

Measured on a quarter-on-quarter basis (q/q), GDP growth was up 0.1% q/q in the second quarter of 2023, after contracting by 0.4% q/q in the first quarter of 2023. Consequently, Singapore narrowly avoided a technical recession as defined by two successive quarters of contracting quarter-on-quarter GDP.

Manufacturing output fell by 7.3% y/y in Q2 2023, following a decline of 5.4% q/q in Q1 2023. Manufacturing output also fell by 1.0% q/q in Q2 2023, after a contraction of 4.6% q/q in Q1 2023.

The construction sector was a bright spot amongst the goods-producing industries, with output up by 6.8% y/y in Q2 2023, after strong growth on 6.9% y/y in Q1 2023 and of 6.7% y/y in calendar 2022.

The service sector also showed positive growth of 2.6% y/y in Q2 2023, with output up 0.8% q/q. The removal of many COVID-19 restrictions since April 2022 and improving tourism flows supported buoyant growth in the accommodation segment, which grew by 13.0% y/y in Q2 2023 after growing by 21.8% y/y in Q1 2023.

International tourism has rebounded during 2023, with international visitor arrivals having risen to 1.42 million arrivals in the month of July, up from the 1.13 million monthly arrivals in June. Total international visitor arrivals reached 7.7 million for the first seven months of 2023. The tourism rebound has been helped by strong tourism inflows from other APAC nations, notably Indonesia, Malaysia, India and Australia, also helped by a significant upturn in visitors from mainland China in July. The number of visitor arrivals is broadly on track to meet the Singapore Tourism Board's target of 12 million tourist visitors in 2023, about double the total tourism arrivals in 2022, which was estimated at 6.3 million.

Singapore's private sector expansion accelerated midway into the third quarter according to the latest S&P Global Singapore PMI data. Business activity rose in tandem with higher new orders, though export conditions remained weak.

The headline seasonally adjusted S&P Global Singapore Purchasing Manager's Index (PMI) - a composite single figure indicator of performance - rose to 53.6 in August, up from 51.3 in July. This signalled a sixth consecutive monthly improvement in private sector conditions and at a pace above the series average.

Manufacturing sector slowdown continues in third quarter of 2023

Latest statistics from Singapore's Economic Development Board showed that manufacturing output continued to weaken in July 2023 compared to the same month a year ago, albeit marginally, declining by 0.9% y/y. However, when measured on a month-on-month (m/m) basis, manufacturing output rose by 4.1% m/m.

There was a mixed picture across different industry segments. Electronics output rose by 5.1% y/y in July while chemicals output rose by 2.3% y/y. Transport engineering output rose by 20.7% y/y. However, precision engineering output fell by 7.6% y/y while biomedical manufacturing slumped by 22.6% y/y, due to a 42.4% y/y decline in pharmaceuticals output.

Reflecting the weakness of manufacturing sector new orders since mid-2022, Singapore's non-oil domestic exports (NODX) fell by 20.1% y/y in August, following a 20.2% y/y contraction in July, according to latest data released by Enterprise Singapore.

Exports electronics products fell by 21.1% y/y in August, while exports of non-electronic products also showed a steep decline of 19.9% y/y. Key export sectors recording large declines were exports of structures of boats and ships, which fell by 97.7% y/y, specialized machinery, which fell by 25.5% y/y, while exports of pharmaceuticals fell by 37.7% y/y. Exports of non-electronic products to mainland China fell by 16.1% y/y in August, with a decline of 26.1% y/y in exports to South Korea. Exports of non-electronic products to the US slumped by 37.2% y/y, reversing the strong increase of 39.2% y/y in July.

Inflation pressures have eased

According to the latest S&P Global Singapore PMI survey, overall input price inflation rose in August, with higher purchasing costs and wages both contributing to rising cost burdens for businesses. Consequently, private sector firms raised their selling prices again in August. The rates of both input cost and charge inflation, while still among the weakest in two years, continued to show increases.

Singapore's headline CPI inflation rate moderated to 4.1% y/y in July compared with 4.5% y/y in June. The Monetary Authority of Singapore (MAS) Core Inflation measure fell to 3.8% y/y in July compared with 4.2% y/y in June.

Headwinds from moderating global electronics demand

The electronics manufacturing industry is a key segment of Singapore's manufacturing sector, accounting for 40% of the total weight of manufacturing output, dominated by semiconductors-related production. S&P Global PMI survey data since mid-2022 indicates that the global electronics manufacturing industry is continuing to face headwinds from the weak pace of global economic growth.

The headline seasonally adjusted S&P Global Electronics PMI fell to 46.9 in August compared with 47.5 in July, continuing to signal contractionary conditions in the global electronics sector. The latest headline figure came amid the strongest contraction in new order volumes since November 2022, which also contributed to a solid fall in output.

Weakening global economic growth momentum has impacted on consumer demand for electronics, with soft demand in mainland China also contributing to the downturn in new orders.

Singapore's electronics output rose by 5.1% in July, although electronics output was sharply down by 7.8% y/y in the first seven months of 2023. Semiconductors output, which accounts for the largest share of total electronics production in Singapore, rose by 5.8% y/y in July, although posting a decline of 7.4% y/y for the first seven months of 2023.

Singapore's non-oil domestic exports of electronics continued to show sharp declines in August 2023, falling by 21.1% year-on-year according to exports data released by Enterprise Singapore. Exports of integrated circuits fell by 28.5% y/y, while exports of PCs fell by 25.6% y/y.

Exports of electronics products to markets in Northeast Asia remained very weak in August, with electronics exports to mainland China declining by 17.8% y/y. Electronics exports to Japan were also weak, falling by 17.0% y/y, while electronics exports to South Korea fell sharply, by 41.9% year-over-year. However, electronics exports to the EU showed marginal positive growth of 1.0% y/y. Electronics exports to the US, which had shown a positive increase of 11.7% y/y in July, contracted marginally by 1.6% y/y in August.

Singapore's economic outlook

After a second year of rapid economic recovery from the pandemic in 2022, economic growth momentum has moderated significantly during 2023. GDP growth is forecast by S&P Global Market Intelligence to slow to 1.2% in 2023, a significant moderation in growth momentum compared with GDP growth of 3.6% in 2022 and 8.9% y/y in 2021.

Following the release of the revised second quarter GDP statistics, the Ministry of Trade and Industry also lowered its forecast for GDP growth in 2023 from a previous range of 0.5% to 2.5% to a lower range of 0.5% to 1.5%. According to the June 2023 Survey of Professional Forecasters produced by the MAS, the median GDP forecast for 2023 is for growth of 1.4%, significantly lower than the forecast from the March 2023 Survey, which was for GDP growth of 1.9% in 2023.

With continuing headwinds to global growth momentum in 2023 due to very weak growth in the US and EU and sluggish economic recovery in mainland China, the outlook for Singapore's manufacturing sector remains challenging. However, stronger exports of services, notably due to rising international tourist arrivals, will help to mitigate the impact of weaker growth in manufacturing exports.

The increase in Singapore's Goods and Services Tax by 1% from 7% to 8% implemented on 1 January 2023 has also acted as a slight drag on economic growth in 2023, raising fiscal revenue by an estimated 0.7% of GDP per year.

In 2023, taking into account the 1% increase in GST from 1st January 2023, headline and core CPI inflation are projected to average 4.5%-5.5% and 3.5%-4.5% respectively. MAS Core Inflation is projected by the MAS and MTI to moderate in the second half of 2023, as import costs remain low and tightness in the labour market eases. However, the MAS and MTI note upside risks to the inflation outlook from potential shocks to global food commodity prices as well as if persistent tightness in the labour market keeps upward pressures on wage rises.

The medium-term outlook for Singapore's manufacturing sector is supported by a number of positive factors.

Despite near-term headwinds, medium-term prospects for Singapore's electronics industry remains favourable. The outlook for electronics demand is underpinned by major technological developments, including 5G rollout over the next five years, which will drive demand for 5G mobile phones. Demand for industrial electronics is also expected to grow rapidly over the medium term, helped by Industry 4.0, as industrial automation and the Internet of Things boosts rapidly growth in demand for industrial electronics. Singapore also remains an attractive hub for supply chain diversification for some high value-added segments of the electronics industry, as electronics manufacturers continue to diversify their supply chains for production of critical electronics products, notably semiconductors. Reflecting these trends, in 2022, Singapore attracted significant new foreign direct investment inflows into electronics manufacturing.

In the biomedical manufacturing sector, a number of new manufacturing facilities are being built by pharmaceuticals multinationals. This includes a new vaccine manufacturing facility being built by Sanofi Pasteur and a new mRNA vaccine manufacturing plant being built by BioNTech.

The aerospace engineering sector is currently experiencing rapid growth as the reopening of international borders in APAC is boosting commercial air travel across the region. Singapore's role as a leading international aviation hub is likely to continue to strengthen over the medium-term, helped by strong growth in APAC air travel and its role as a key Maintenance, Repair and Overhaul (MRO) hub in APAC.

In the service sector, Singapore is expected to continue to be a leading global international financial centre for investment banking, wealth management and asset management. Singapore will also continue to be a key APAC hub for shipping, aviation and logistics, as well as an important APAC hub for regional headquartering.

However, an important long-term challenge for the Singapore economy will be from ageing demographics. In Budget 2023, the finance minister stated that a key issue for the Singapore economy over the medium to long term will be from demographic ageing, with Singapore having one of the world's fasted ageing populations. The proportion of Singapore's population that is currently aged over 65 years is one-sixth of the population, but this will rise to an estimated one-quarter by 2030. This will result in rising healthcare and social welfare costs and could gradually reduce Singapore's long-term potential GDP growth rate. The role of fiscal policy in addressing demographic ageing will continue to be a key focus for government policy over coming years as the economic impact of demographic ageing intensifies.

Access the press release here.

Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence

Rajiv.biswas@spglobal.com

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