Singapore: Strong 2Q but normalisation ahead

The Singapore economy is projected to clock a strong performance in the second quarter based on the advance GDP estimates, but expect slower growth ahead.
Irvin Seah14 Jul 2021
  • Advance GDP estimates for 2Q21 came in at 14.3% YoY and -2.0% QoQ sa
  • This was in line with DBS’s expectation of 14.2% YoY and -2.1% QoQ sa
  • Implication for our forecast – On track to meet our growth forecast of 6.3% for 2021
  • Implications for investors – Risk of monetary policy normalisation ahead
Photo credit: Unsplash

The Singapore economy is projected to clock a strong performance in the second quarter based on the advance GDP estimates. The official figures point to a robust expansion of 14.3% YoY (-2.0% QoQ sa) in the quarter, much in line with DBS’s forecasts of 14.2% YoY (-2.1% QoQ sa). The strong YoY headline growth is largely the result of the low base last year due to the Circuit Breaker, while the sequential decline can be attributed to the implementation of the Phase Two Heightened Alert (P2HA) measures in May-June to contain the spread of COVID in recent months.

We estimated that the P2/3HA probably has cost the Singapore economy about SGD 764.2mn (approx. 0.16% of nominal GDP) during the 4-5 weeks period, and considerably less severe compared to the Circuit Breaker last year. The F&B, retail, and to some extent, the real estate and professional services sector are the worst hit whereas other major clusters such as manufacturing, financial, and wholesale trade services were less affected.

While the manufacturing sector remains in the driving seat, the story beneath the strong showing is that there are emerging signs of slower growth pace ahead. Despite a projected 18.5% YoY expansion, a mild decline of 1.8% has been factored into the official estimation. This confirms our long-held belief that while the sector will largely remain in expansion mode in the coming quarter, momentum is easing. Existing shortages of semiconductor chips will put a lid on the pace of expansion in the electronics cluster even though global demand for high end electronics parts and components remains strong Moreover, the moderation in the biomedical sector growth is also due to the high base last year.

Though outlook for the construction sector is improving, its supply-side constraints are worsening. The sharp upturn of 98.8% YoY is largely due to low base. In contrast, the sequential decline of 11% sa is reflecting the manpower crunch within this sector. Further tightening of border control measures, particularly with respect to South Asian countries, which are the key sources of manpower for the sector, will continue to weigh down on the performance of the sector in the coming months, unless new short-term measures are put in place to overcome the manpower crunch.

Despite the strong showing (9.8% YoY) in the services sector, outlook for the sector is far from being hunky-dory. Performance in the services sector has been mixed and will likely remain so in the coming months. The impact of the P2/3HA measures on F&B, retail and professional services has been manifested in the 2Q21 GDP figures, with the overall sector dipping by 1.0% QoQ sa in the quarter. Moreover, tourism related industries such as aviation and accommodation remain weighed down by the ongoing COVID situation, particularly with the severe infection rate in many of the key tourism markets in the region (e.g., Indonesia, Malaysia and Thailand). Indeed, outlook for these industries remains cloudy. It is unlikely that the real GDP (in level terms) of these sectors will return to pre-COVID levels within this year despite rising hope of border reopening.

Slower growth ahead

Economic normalisation is underway. The sequential pullback reported in today’s advance estimates is well in line with our expectation (refer to DBS report “Singapore: Towards mass vaccination and economic recovery” dated 15 Jun21 for more details). GDP growth in the first half of the year is now expected to average 7.8%. The economy remains well on track to meet our full year GDP growth forecast of 6.3% for 2021, but that also implies expectation for a growth slowdown in 2H21. A combination of slower growth momentum in manufacturing, manpower crunch in construction, and continued drag from COVID on tourism related sectors will make for a slower second half of the year.

There are signs of rising inflation. Should inflation readings continue to trend higher, the MAS will be on “heightened alert”. Granted that the SGD NEER remains well within the upper half of the SGD policy band for now, and the authority can afford to adopt a “wait and see” approach. But as economic recovery continues and external price pressure builds up, risk of a pre-emptive action by the authority in October should not be discounted. Indeed, data on inflation and growth in the coming months will provide clues on where the risk will be tilting.

To read the full report, click here to Download the PDF.

Irvin Seah

Economist - Singapore
Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.
The information herein is published by DBS Bank Ltd. It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. DBS Bank Ltd., Hong Kong SAR Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.