2H2022 Outlook for the Singapore Economy August 11, 2022

Introduction

In late May, the Ministry of Trade and Industry (MTI), released the results for the Economic Survey of Singapore for the First Quarter of 2022, where they indicated that they will maintain their 2022 full year GDP growth forecast at a range of between 3 to 5 per cent.

The MTI further mentions that they expect growth to be in the lower half of the range. In the first quarter of 2022, the Singapore economy expanded by 3.7 per cent on a year on year basis, which is a drop from the 6.1 per cent increase recorded in the previous quarter.

The MTI has expected the full year growth to come in at the lower half of the forecast range due in large part to a weaker outlook for external demand. This weakening demand is due to a worsened external economic environment, due to the Russia-Ukraine conflict, which has caused supply disruptions of essential commodities, resulting in inflationary pressures on many countries across the world. The strict measures that China has implemented as part of their Zero-COVID policy have also contributed to global supply disruptions, leading to production constraints, and hampered GDP growth.

Factors leading to poor external demand

The MTI report has identified some key factors that has negatively affected the external demand outlook for Singapore’s export-oriented economy. Firstly, the ongoing conflict between Russia and Ukraine has caused surging commodity prices, which further escalated rising inflation rates in many countries across the world. The persisting conflict has also caused uncertainty in firms and investors, and dampened growth prospects. Secondly, global industrial production could face more severe constraints due to continued supply disruptions if the Russia-Ukraine conflict is prolonged, or if governments implement new COVID-19 lockdowns to counter a possible resurgence of the virus.

Thirdly, monetary policy tightening in advanced economies will lead to large capital outflows from economies with high levels of US dollar denominated debt instrument, and cause tighter financial conditions in advanced economies, further dampening growth prospects. Lastly, the threat of new COVID-19 strains with increased virulence still remains. Should such a strain surface, it could possibly lead to control measures such as lockdowns and restrictions, which will severely affect economic growth.

Sectors with positive outlook

However, there are some economic sectors with an improved growth outlook. One of these is the electronics sector. This is due to a healthy global demand for semiconductors, cloud services and data centre services. With the implementation of the Vaccinated Travel Framework, we expect aviation and tourism related sectors to see strong growth. The professional services sector will also see improved growth prospects, as the relaxation of travel restrictions in Singapore and neighbouring countries will allow firms to send staff overseas to service clients that are residing in these countries.

The relaxation of travel restrictions and domestic restrictions will also aid the recovery of consumer facing sectors such as retail, food and beverage and hospitality sectors. It will also help to provide relief to companies which are facing labour shortages due to their reliance on foreign labour.

Opportunities for Investors

We recommend that investors pay close attention to two groups of stocks. Firstly, investors should consider banking stocks such as DBS, OCBC and UOB. The US Federal Reserve has raised interest rates multiple times this year, and is expected to continue rate hikes for the rest of this year as it struggles to bring record high levels of inflation in the US under control.

As Singapore interest rates are largely determined by foreign interest rates, (the US interest rates in particular) they have begun to rise and are expected to continue increasing. The three local banks have already announced the release of home loan packages with increased interest rates. This will help to increase the net interest margin of the local banks, which is a key indicator of their profitability.

The next group of stocks that we think investors should watch closely are travel-related stocks. These are the stocks of companies that are directly involved in, or closely related to the tourism industry, such as hospitality REITs, retail REITs and Singapore Airlines. They include counters such as SIA, Frasers Hospitality Trust and Capitaland Mall Trust. We expect these stocks to benefit from the implementation of the Vaccinated Travel Framework and the relaxation of COVID-19 restrictions in Singapore.

Outlook for the near future

The Singapore Government has stated that while they expect growth to moderate further, they do not expect the Singapore economy to enter a recession or stagflation in 2023. This is largely due to the reopening of borders to travellers, and increased domestic demand from the relaxation of COVID-19 restrictions, which will help to mitigate the effects of weaker external demand. It has also been mentioned that inflation is expected to rise as we move towards the end of 2022, but will start to moderate as we approach 2023.

Another point mentioned was the impact on Singapore’s domestic interest rates from the interest rate hikes by many central banks in developed economies, such as the US Federal Reserve. While the increase in domestic interest rates have been tempered by a rising Singapore dollar, the Singapore Government has advised individuals and businesses to be wary of rising borrowing costs, especially as global interest rates are expected to continue to rise.

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