Commentary: Singapore economy set for V-shaped recovery this year but jobs market may take longer to rebound
While the outlook for the Singapore economy looks promising, several factors are still in play which requires caution, says OCBC’s Selena Ling.
SINGAPORE: After a double-digit slump of 13.4 per cent year-on-year in the second quarter of 2020 during the global lockdown period, the Singapore economy has begun to turn the corner.
While GDP growth continued to shrink in the second half of 2020, nevertheless the pace of contraction has been moderating.
Advance estimates of the fourth quarter 2020 saw a milder than expected 3.8 per cent year-on-year decline, and preliminary estimates for 2020 put the full-year contraction at 5.8 per cent year-on-year.
The last time Singapore faced an economic crisis of this magnitude, during the 2008 to 2009 global financial crisis, it bounced back sharply by 14.5 per cent in 2010.
For 2021, we expect a bounce back of up to 4 per cent to 6 per cent year-on-year growth, aided by the very low base in 2020, before normalising back to trend growth around of 3 per cent in 2022.
This seemingly V-shaped GDP growth recovery will be more broad-based, with the construction and services sectors likely to revert to positive on-year growth, but the jobs market may take longer to recover to pre-COVID-19 levels.
FALL OUT FROM COVID-19 TO BE LONGER
The baseline scenario appears to be a slow and uneven recovery for the global economy, even with the dissemination of the vaccine now well underway.
The assumed lift to both business and consumer confidence has to happen for the nascent economic recovery to take root and a synchronised upturn to develop.
Unemployment rates may remain elevated for longer, even as interest rates remain low.
This is because the COVID-19 pandemic has fundamentally changed the way people live and work so businesses that have not adapted fast enough have faced closures in many instances, displacing workers. Some of these jobs may never come back with the accelerated pace of disruption.
The Jobs Support Scheme introduced in 2020 has bought hard-pressed businesses some time to ride through the worst of the pandemic, similar to the Jobs Credit Scheme in 2009.
Nevertheless the domestic labour market recovery may take longer this time round due to the vaccine not being a panacea to the COVID-19 pandemic and also because the structural challenges of an ageing population and the matter of skills obsolescence still remains.
CHALLENGES REMAIN BECAUSE OF COVID
This is not to say that we’re bearish on 2021 growth prospects, but the optimism must come with a dose of realistic caution. The medium-term challenges remain formidable.
Fostering new growth opportunities, collaborating in open and free trade - for instance, the recently signed Regional Comprehensive Economic Partnership (RCEP) for a start - and investing in retraining and reskilling workers will help to relieve the potential economic scarring of the pandemic.
Singapore’s economic recovery remains dependent on the global vaccine developments as well as on the global economic recovery and the state of COVID-19 containment both globally and domestically.
On the external front, while China has made significant headway as the first-in-first-out of the COVID-19 crisis, other major economies like the US and Eurozone are still experiencing resurgent waves.
The shape of the downturn triggered by COVID-19 is different from previous crises.
The scale of disruptions to the services sector and global supply chains will continue to have a ricocheting impact on the form of foreign direct investments, portfolio flows and investment decisions.
The COVID-19 pandemic had demonstrated how vulnerable our global supply chains were to over-reliance on a single supplier nation for critical component or material supplies and the need for contingency supply options and alternative manufacturing facilities amid disruptions on the flow of both people and goods across international borders.
For instance, during the thick of the global lockdown last year, we realised that the production of the most advanced smartphone chips are concentrated in Taiwan, while the refining of neodymium for the magnets in AirPods and electric vehicle motors are almost exclusively in China.
Therefore, manufacturers are rethinking about their use of lean manufacturing strategies and specialised producers to diversify their production risks through on-shoring or near-shoring, as well as hold safety inventories in case of supply shocks.
Shifting production lines also necessitate different logistics and flexible capacity strategies as well.
The ASEAN region may benefit from the “China plus one” strategy and the global supply chain shifts, but are also vulnerable to idiosyncratic risks including subsequent COVID-19 waves which has hit tourism-reliant Thailand hard, as well as domestic political uncertainties in Malaysia.
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As such, a gradual and uneven recovery path, with many major economies not returning to pre-COVID levels until at least end-2021 may continue to weigh on both business and consumer confidence in the near-term.
THREE KEY DRIVERS OF GROWTH
Looking ahead into 2021 and beyond, Singapore’s growth recovery will be driven by three fronts.
Firstly, a global pickup in economic activity should improve trade-related services, especially in wholesale trade. Container freight rates continue to soar amid improving global demand, with an unexpectedly sharp rebound in the second half of 2020.
For instance, China saw a record trade surplus of US$78.18 billion in December 2020 as demand for pandemic-related materials, electronics, mechanical and electrical products surged.
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Despite the pickup in COVID-19 infections warranting lockdowns in certain cities like Hebei, the economic impact on China should be limited for now.
Second, a COVID-19 vaccine deployment will likely encourage the re-opening of international borders, which could support the recovery of the aviation- and tourism-related sectors.
In tandem, retail trade and F&B services should also see an improvement from their current dire state.
Foreign worker policy remains tight, so employers will increasingly be tapping on the domestic workforce to meet their manpower needs, whether through training or reskilling.
Last but not least, the construction sector should also gradually recover from the dampened activity levels in 2020.
Total construction demand is expected to recover to between S$23 billion to S$28 billion this year, up from S$21.3 billion in 2020, according to the Building and Construction Authority.
Public sector projects will drive the bulk - 65 per cent - of this year’s demand, given stronger demand for public housing and infrastructural projects including the Jurong Region MRT line, the Cross Island MRT line Phase 1, and the Deep Tunnel Sewerage System Phase 2.
Private-sector demand that had nearly halved from S$14.5 billion in 2019 to S$8.1 billion last year should stabilise or improve slightly at about S$8 billion toS$10 billion this year, driven by the development of the remaining en bloc residential sites, major retrofitting of commercial developments and construction of high-specification industrial buildings.
However, construction players remain concerned about manpower constraints and rising material costs amid the lockdown restrictions affecting supplies from other countries.
WHAT MORE CAN THE GOVERNMENT DO?
Like the rest of the world, both fiscal and monetary policy accommodation have been on tap in Singapore to combat the pandemic and its economic spill-overs.
Fiscal policy stimulus has been unprecedented in 2020, with nearly S$100 billion expended in four budgets, amounting to around 20 per cent of GDP and warranting S$52 billion of draws on past reserves.
Key initiatives in the form of the Jobs Support Scheme, rental and other assistance, and loan moratoriums have been critical in shoring up the Singapore economy in the near-term, but many of these measures are being gradually grandfathered as the Singapore economy is now past the worst, albeit we are nowhere near pre-COVID norms yet.
We expect Budget 2021 to remain expansionary, but the scale is likely to be more modest given the high bar set in 2020.
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Protecting jobs and livelihoods are likely to remain a key priority but positioning for the post-COVID future through digital transformation, encouraging new growth areas and industries will be instrumental to ensuring Singapore’s economic resilience and competitiveness going ahead.
In particular, newer areas like sustainability and cybersecurity may garner more policy attention.
Given the likely shortfall in tax revenue receipts in 2020, which is likely to extend to 2021, there may be a need to reiterate the need for fiscal prudence and potentially signal the intention to still hike the GST from 7 per cent to 9 per cent before 2025.
Selena Ling is Chief Economist and Head of Treasury Research at OCBC Bank.