Singapore: External shocks will weigh on the 2022 economic outlook

Event

Singapore’s economy recovered strongly in 2021 after the 5.4% contraction in 2020 (the first since 2001). National figures of 7.2% of real GDP growth showed an acceleration of economic activity compared to an annual 6% forecasted by the IMF last October. The outlook for this year, however, is less upbeat due to several downside risks that might halve GDP growth to 3.2%.

Impact

Singapore’s sharp rebound in 2021 highlighted impressive performances – particularly thanks to the manufacturing and mineral sector – despite a poor 2nd quarter due to the wave of the Delta variant. As shown since the beginning of the pandemic, Singapore is very vulnerable to Covid-19 especially as a strict policy had been in place for a long time. Hence, the pandemic remains a clear risk clouding this year’s outlook. However, since last August, the authorities have switched from a zero tolerance policy to the ‘living with Covid-19’ approach. This strategy was reconfirmed recently by the announcement of quarantine-free travel rules for foreign travellers once the Omicron wave has passed. This evolution in policy is supported by high vaccination rates (close to 90%) in the city-state and high economic costs of a strict Covid-19 policy. Nevertheless, Singapore is currently experiencing a record wave of infections that will impact the economy, at least temporarily as the Omicron variant tends to be much milder than its predecessor.

Besides the pandemic, Singapore’s very open economy is expected to remain exposed to external shocks in 2022. Geopolitical risks, global supply chain disruptions, the semiconductor shortage, slowing global trade and high energy prices are the dominant external risks likely to affect Singapore’s economic performance. Moreover, the monetary tightening in the US, financial market volatility and the Chinese slowdown could hit Singapore’s financial centre and put downward pressure on the stable Singapore dollar. Inflation pressures, fuelled also by rapid wage growth, have been on the rise over the past months and are there to stay for some time, thereby harming domestic demand. The inflation rate reached 4% at the end of 2021 but might moderate somewhat during the year. On the positive side, the services sector – particularly tourism – might benefit from a less deadly Covid-19 variant and relaxed domestic restrictions. Additionally, the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free-trade zone, entered into force in January and is likely to boost intraregional trade in Asia. Hence, this support for exports from Singapore, an RCEP member, could mitigate the impact of expected weaker global trade. Taking into account all those expected developments, Singapore’s business environment risk is expected to remain stable at C/G in the near term.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com