The Singapore economy recorded GDP growth of 3.6% year-on-year (y/y) in 2022, with quarterly growth momentum having moderated to 2.1% y/y in the fourth quarter of 2022. Singapore's manufacturing sector has continued to slow down in early 2023, with manufacturing output declining by 8.9% y/y in February. Singapore's Ministry of Trade and Industry (MTI) has maintained its GDP growth forecast for 2023 in the range of 0.5% to 2.5%.

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). However, the gradual recovery expected for mainland China's domestic demand during 2023 should help to mitigate the impact of weak US and EU orders. The service sector economy is expected to be more resilient, with Singapore's services exports boosted by the continued recovery of international tourism travel in the APAC region.

Singapore economy shows some moderation

Singapore's estimate for fourth quarter GDP for 2022 showed a moderation in the pace of growth to 2.1% y/y, compared with 4.0% y/y in the third quarter. On a quarter-on-quarter (q/q) basis, GDP growth slowed to 0.1% q/q in Q4 2022, compared with 0.8% q/q in Q3 2022.

The service sector recorded a small contraction of 0.2% q/q in Q4 2022, although showing positive growth of 4.0% y/y. The gradual removal of many COVID-19 related restrictions since April 2022 supported buoyant growth in the accommodation segment, which grew by 7.8% y/y.

New orders and output continued to expand in the Singapore private sector in February according to the headline seasonally adjusted S&P Global Singapore Purchasing Manager's Index (PMI). However, the overall headline index declined from 51.2 in January to 49.6 in February. While the January PMI reading had risen above the 50.0 neutral threshold, which had signalled a renewed improvement in private sector conditions at the start of 2023, the February reading edged back down below the 50.0 mark, indicating a renewed contraction - albeit marginal - in private sector conditions.

Manufacturing sector slowdown continues in early 2023

Latest statistics from Singapore's Economic Development Board (EDB) showed that manufacturing output continued to weaken in February 2023, declining by 8.9% y/y and by 11.7% month-on-month (m/m). This sharp downturn reflected contraction in output of electronics, chemicals and biomedical manufacturing. Electronics output fell by 10.0% y/y while biomedical manufacturing fell by 33.6% y/y, the latter mainly reflecting a 59% y/y decline in pharmaceuticals output. Chemicals output contracted by 14.9% y/y, due to a combination of weak demand and plant maintenance shutdowns.

That said, transport engineering showed strong growth of 22.9% y/y, helped by a 41% y/y rise in output of the marine and offshore engineering sector, while aerospace engineering was up 26.1%.

Reflecting the weakness of manufacturing sector new orders in recent months, Singapore's non-oil domestic exports (NODX) fell by 15.6% y/y in February, following a 25.0% y/y contraction in January. This was according to latest data released by Enterprise Singapore. The data marked the fifth successive month of year-on-year contraction in Singapore's merchandise exports.

Inflation pressures

According to the February S&P Global Singapore PMI survey, input cost inflationary pressures eased from January's record level, reflecting softer producer price inflation and lower labour costs. However, bank charges, raw materials and transportation costs continued to rise, with the overall rate of input price inflation still among the highest on record. Due to lower input price inflation and weak new business growth, the private sector raised output prices at the slowest rate in 15 months.

Singapore's CPI inflation rate eased to 6.3% % y/y in February from 6.6% y/y in January. The Monetary Authority of Singapore's (MAS) core inflation measure remained at 5.5% y/y in February, the same pace as in January.

The MAS and MTI estimate that for calendar 2023, taking into account the 1% increase in goods and services tax (GST) that took effect on 1st January 2023, headline and core CPI inflation are projected to average 5.5%-6.5% and 3.5%-4.5% respectively.

Moderating global electronics demand adds to headwinds

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 facing headwinds from the weakening pace of global economic growth.

The headline seasonally adjusted PMI posted 51.4 in February, up from 48.7 in January, to reflect a return to expansion territory for the global electronics sector midway through the first quarter. The rate of growth was also the fastest since last July and was supported by improvements in new orders and output.

The level of work outstanding at global electronics manufacturers fell for an eighth straight month in February, though the rate of contraction eased to the slowest since last October. Anecdotal evidence suggested that higher production supported the clearing of manufacturing backlogs in February.

Weakening economic growth momentum in the US and EU has impacted on consumer demand for electronics, with the economic slowdown in mainland China during the fourth quarter of 2022 also contributing to the downturn in new orders.

Singapore's non-oil domestic exports of electronics fell by 26.5% y/y, according to exports data for February released by Enterprise Singapore. Exports of integrated circuits fell by 34.2% y/y, while exports of disk media products fell by 45.5% y/y. Exports of electronics products to mainland China remained very weak, declining by 32.2% y/y. Electronics exports to Japan were also weak, falling by 38.0% y/y.

Singapore's economic outlook

The Singapore economy recorded a second year of economic recovery from the pandemic in 2022, growing by 3.6% y/y, after growth of 8.9% y/y in 2021. Singapore's GDP growth in 2022 was buoyed by strong growth in domestic consumption and an upturn in international tourism expenditure, as COVID-19 restrictions were progressively eased in Singapore as well as a growing number of other Asia-Pacific economies.

With increasing headwinds to global growth momentum in 2023 due to expected weak growth in the US and EU, the outlook for Singapore's manufacturing sector and some trade-related services is for weaker growth in 2023. However there are early signs that domestic demand in mainland China is gradually improving, which should help to mitigate the impact of slowing export orders for Singapore's manufacturing sector in the US and EU during 2023. Stronger exports of services, notably due to rising international tourist arrivals, will also help to partially offset the impact of weaker growth in merchandise exports.

The increase in Singapore's GST by 1% from 7% to 8% implemented on 1st January 2023 will also act as a slight drag on economic growth in 2023, raising fiscal revenue by an estimated 0.7% of GDP per year. Singapore's MTI has maintained its GDP growth forecast for 2023 in the range of 0.5% to 2.5%.

In 2023, taking into account the 1% increase in GST from 1st January 2023, headline and core CPI inflation are projected to average 5.5%-6.5% and 3.5%-4.5% respectively. MAS Core Inflation is projected by the MAS and MTI to remain elevated over the next few quarters, with risks still tilted to the upside, due to factors such as potential renewed shocks to world commodity prices and persistent global inflation pressures. Although prices of energy and food commodities have eased from their peaks, businesses will face higher utility prices and rising unit labour costs in the near-term. The MAS and MTI expect that MAS Core Inflation will moderate in the second half of 2023, as tightness in the domestic labour market eases and global inflation pressures moderate.

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

The overall medium-term global demand outlook for Singapore's electronics industry remains favourable, 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 (IoT) 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, Singapore attracted significant new foreign direct investment inflows into electronics manufacturing in 2022.

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.

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

Rajiv.biswas@spglobal.com

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Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.

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