Financial outlook: Singapore economy

Last week, Singapore reported a worse than expected 41.2% fall in GDP for Q2 and a 12.6% contraction YoY. However, this is expected given that the implementation of the circuit breaker took place in the same period. The lockdown, although necessary, has disrupted domestic economic activities which affected a large part of our economy. The situation is further compounded by the global recession across nations resulting in a significantly weaker global demand and  disruptions to global supply chains.  As a result, total trade fell 25% recording its third straight month of contraction. 

In terms of sector performance on a QoQ basis, Manufacturing held out the best despite a 23.1% fall and from a YoY basis, the sector grew by 2.5%. This is due to a surge in demand for biological and pharmaceutical products which lifted the sector’s overall performance. Electronics fared better than expected too. Next, Construction plummeted 95.6% QoQ and 54.7% YoY. This is largely attributed to the lockdown in which manpower was affected and most construction activities were halted. Lastly, Services shrank 37.7% QoQ and 13.6% YoY as non-essential services and workplaces had to close on top of a travel ban. Evidently,  hospitality, tourism and aviation was impacted greatly. Consequently, the Monetary Authority of Singapore (MAS) has cut the year end growth forecast and GDP is expected to continue to contract between 4 to 7 % with a median expectation of 5.5%. 

Economic recovery outlook

A gentle V recovery rather than a sharp V is expected as recovery is slow since it is contingent on the outbreaks of infection domestically and abroad. Until a vaccine is publicly available, the full reopening of economies will still be somewhat restricted and economic activities are expected to remain below pre-pandemic levels. Moreover, given the openness of Singapore’s economy, trade recovery hinges on the recovery of global trade and travel. 

Despite this, the outlook for recovery still remains fairly positive given the measures implemented by the government. 

On the fiscal side, stimulus packages amounting up to S$92.9billion (19.2% of GDP) have been rolled out to cushion the impact of the pandemic on businesses and households. As there is usually a lag time before the full multiplier effect can be  sufficiently observed, the Q2 results did not fully capture this. Therefore, figures for Q2 were lower than they should be. 

On the monetary front, the S$NEER (Singapore dollar nominal effective exchange rate) policy band was “depreciated to a level slightly below the midpoint of the policy band” while there are no changes to the width. MAS has also adopted a zero appreciation slope of the policy band. This is undertaken to provide stability to the trade-weighted exchange rate and to adjust the pace of appreciation/depreciation of the SGD according to current conditions here. 

Singapore has now entered phase 2 of the lockdown where dining and entertainment services are allowed albeit in small groups. So far, daily new community cases are still relatively low and the government’s effective handling of the pandemic seems to be boosting consumer sentiment. Thus, the public is more confident which will encourage them to dine out more. Hence, crowd mobility would increase which will spur private consumption and retail sales.

Overall, as long as there is no significant pick up in COVID-19 cases where the government has to revert back to phase one, the worst seems to be over. The current government measures have started to take effect and the economy is already showing signs of recovery. Most importantly, Singapore still has quite a bit of room to maneuver and if necessary, the resources to do much more. For now, targeted schemes rather than stimulus would be more appropriate in tackling specific issues (ie. unemployment) while avoiding a “taper tantrum” scenario. All in all, in the short run,  improvement is expected although numbers will still remain in contractionary territory.