Commentary: Winds in the Singapore economy sails are starting to stir
The worst is over, thanks to the manufacturing engine coming back to life again, says OCBC’s Selena Ling.
SINGAPORE: The worst may be over for the Singapore economy.
Even though it contracted a milder 7 per cent year-on-year in the third quarter of 2020, the economy rebounded a seasonally-adjusted 7.9 per cent from the second quarter, according to advance estimates based on July and August data.
The rebound was largely driven by the manufacturing sector.
The latest September industrial production data blew away market expectations with a 24.2 per cent year-on-year surge in September, led mainly by pharmaceuticals, which grew 113.6 per cent from last year, and electronics.
This not only far outstripped market expectations of 2.5 per cent, but also marked the best manufacturing and biomedical annual performance since December 2011 and April 2020 respectively.
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PHARMACEUTICALS SET TO CONTINUE TO BE A KEY DRIVER
This big turbo charge from pharmaceuticals and electronics for September, coupled with the upward revision to the August industrial production data, implies the earlier released advance third quarter manufacturing and GDP growth forecasts are now likely to be revised up to 10 per cent and -5.4 per cent year-on-year respectively.
Assuming this momentum sustains into October and beyond, our manufacturing and GDP growth forecast for the fourth quarter could also be better than initially expected at 5.2 per cent and -1 per cent year-on-year respectively.
This means that the full year 2020 GDP growth could come in better than our forecast of -5.5 per cent to be closer to -5.0 per cent instead, which is the milder end of the current official growth forecast of -5 per cent to -7 per cent.
When the third quarter GDP estimates are revised in November, it is very likely that the official 2020 growth forecast will be similarly narrowed to around -5 per cent to -6 per cent.
Pharmaceutical demand remains resilient given the current uptick in global COVID-19 cases with the approaching winter. The base for the biomedical cluster is also very low going ahead for the final quarter, where the comparison is with pre-coronavirus levels.
So it is likely that pharmaceutical growth should sustain - albeit maybe not at the more than 100 per cent pace seen in September - especially if the resurgent waves of COVID-19 infections continue to weigh globally.
Assuming that vaccine developments ramp up globally, there could be sustained momentum for the domestic biomedical cluster.
Electronics also continues to benefit from the semiconductor upturn, with work-from-home arrangements driving demand for cloud computing and data centres.
Additional drivers include new iPhone launches and increased introduction of new 5G products and solutions which is spurring demand to upgrade consumer electronic products.
However, outside of the biomedical and electronics clusters, the other industrial segments like precision engineering, transport engineering and general manufacturing did not fare so well in September.
Barring heightened or protracted uncertainties arising from the US elections for instance, or more major economies going back into lockdowns to contain resurging COVID-19 waves, it looks like the domestic manufacturing engine should be the key outperforming sector for the rest of the year for the Singapore economy.
PRICES ARE RISING
Disinflationary pressures are also abating.
The headline Consumer Price Index (CPI) printed at 0 per cent year-on-year in September, the first non-negative inflationary recording since March 2020, after five months of negative inflation readings. It is also a marked pickup from the -0.4 per cent in August.
Food prices remained buoyant at 1.8 per cent, same as August, while communication prices also accelerated to 2.0 per cent, up from August’s 1.9 per cent.
Household durables and services, and transport costs, driven by the larger hike in car prices, increased 0.7 per cent and 0.5 per cent respectively, contributing to the easing of disinflationary pressures.
For the year-to-date in 2020, headline CPI retreated 0.2 per cent year-on-year. In one-month terms, headline CPI rose for the second straight month by 0.3 per cent in September.
Notably, with the sole exception of communications costs, which slipped 0.4 per cent from the previous month, the other CPI basket segments saw a sequential price recovery.
This suggests that the Singapore economy is gradually recovering and that disinflationary pressures are ebbing.
As the Singapore economy prepares to transit to Phase 3 before the year-end, there may be room for consumer spending to pick up and this could bode well for domestic prices to revert to positive territory in early 2021.
The October Monetary Policy Statement noted that core inflation is likely to pick up from a -0.5 per cent to 0 per cent range in 2020 to 0 per cent to 1 per cent in 2021.
On one hand, external inflation is likely to remain subdued due to soft commodity demand conditions and persistent negative output gaps in Singapore’s major trading partners.
On the domestic front, cost pressures are likely to stay subdued amid the domestic labour market slack, which could be offset by the pickup in demand for some domestic services and private transport costs.
MODEST RECOVERY AHEAD
In addition, the disinflationary effects of government subsidies introduced during the four budgets implemented to combat the COVID-19 crisis will likely subside in 2021 as the subsidies expire over time.
Leading indicators also point to a modest recovery trajectory ahead. The manufacturing and electronics Purchasing Managers’ Index (PMI), which gives the future direction of trends within manufacturing, recorded in the expansion zone of 50.3 and 50.9 in September.
Singapore’s whole economy PMI also improved to 45.1 in September, after slipping to 43.6 in August from 45.6 in July. This suggests that the private sector is stabilising around current levels, albeit still in contraction territory for the eighth consecutive month.
Business activity momentum remains lacklustre in some sectors like accommodation and food services as well as administrative and support services, whereas construction activity picked up as more workers resumed work and more project sites re-opened.
While companies remained in retrenchment mode, the pace of job shedding has slowed, possibly attributable to the extension of the Jobs Support Scheme for another seven months and the new Jobs Growth Scheme.
The employment gauge fell at the slowest rate since February as employers took into consideration the modest improvements in global and domestic recovery prospects but also the recent policy tightening of the minimum salary criteria for certain foreign workers.
Recent developments also bode well for the recovery path ahead.
The announcement of the Singapore-Hong Kong air travel bubble, green business travel lanes with Germany and Indonesia, and the lifting of border restrictions for visitors from China and Victoria in Australia from Nov 6, are welcomed additions for the hard-pressed aviation and tourism-related industries.
Domestically, the gradual lifting of movement and safe distancing restrictions have helped boost economic conditions.
For instance, domestic staycations, which have been popular with Singaporeans unable to travel overseas yet, have helped cushion the impact on the hoteling industry. Footfall for suburban shopping malls and restaurant dining have also picked up.
As the Singapore economy prepares to transit to Phase 3 - which Health Minister Gan Kim Yong said could last for a year or more - and more economic activities resume to normalcy, GDP growth and inflation numbers are likely to revert to positive territory in 2021.
Of course, this is pending further global COVID-19 and vaccine developments, but the wind in our sails are starting to stir.
Selena Ling is Head of Treasury Research and Strategy at OCBC Bank.