Singapore’s 2023 hinges on smooth China reopening

SINGAPORE – Singapore’s export-reliant bellwether economy is bracing for tough times in 2023 with trade expected to shrink or record no growth amid weakening global demand, tighter liquidity and persistent inflation. Accordingly, many economists foresee a possible technical recession in the first half of next year.

Though the Ministry of Trade and Industry (MTI) does not forecast a recession in its baseline scenario, official 2023 projections show gross domestic product (GDP) growth petering to a slow crawl of anywhere between 0.5% and 2.5%. Growth prospects are brightest for tourism and consumer sectors but it remains unclear whether falling export demand can be sufficiently offset.

Singapore’s key non-oil domestic exports, or NODX, which range from petrochemicals and pharmaceuticals to semiconductors and other electronics, tumbled 14.6% year-on-year in November, marking the second consecutive decline following a 6.1% contraction in October. Flagging orders from Hong Kong and China were the largest contributors to the fall.

Beijing eased many of its strict “zero-Covid” rules earlier this month in a policy U-turn following widespread protests, but its reopening has since been complicated by the unchecked spread of the virus and overwhelmed health services. Nonetheless, the potential for a Chinese economic rebound could help Singapore to outperform its downbeat official growth forecast.

“Much will really depend on how quickly China bounces back and to what extent rising infection is severe or not. It boils down to confidence – if the Chinese themselves are confident to get out and get on with life as per normal after three years, then it will be a more significant boost to Singapore,” said Song Seng Wun, an economist with CIMB Private Banking.

EnterpriseSG, an agency under the MTI, published a “cautiously optimistic” forecast of -2.0% to 0.0% growth for both total trade and NODX in 2023, sharply below the 20.0% for total trade and 6.0% for NODX expected in 2022. But if domestic demand in China, Singapore’s top trading partner, rises more than expected, analysts say the city-state’s growth could surprise on the upside.

Chua Hak Bin and Lee Ju Ye of Maybank Kim Eng Research characterized China’s reopening as a “wildcard” for Singapore’s economy in a research note reviewed by Asia Times. “A faster-than-expected China reopening will boost exports, tourism and capital flows, counter the global slowdown and ease the odds of a recession,” said the two senior economists.

People walk along an alley lined with commercial stalls in the Chinatown district of Singapore on May 31, 2021. Photo: AFP / Roslan Rahman

But it remains to be seen when a durable Chinese economic recovery will take hold, with some economists projecting the rebound in the second rather than first half of 2023. Singapore and other trade-reliant Southeast Asian markets, meanwhile, are highly exposed to demand in the United States and Europe, both of which risk tipping into recession as early as the first quarter of next year.

“A deep US recession – because of aggressive and prolonged Fed rate hikes – will likely pull Singapore into a recession,” said Maybank’s Chua and Lee, who estimate the probability of recession at 21% for Singapore and at 39% for the US over the next 12 months. “A US or global recession, if it materializes, will be deflationary and accelerate the fall in inflation.”

Singapore, as a small island nation that imports almost everything it consumes, has been hit hard by food, fuel, retail goods, services and utilities inflation. The Monetary Authority of Singapore (MAS), the city-state’s central bank, has enacted five rounds of monetary tightening since last October, allowing the national dollar to appreciate against a basket of currencies to curb imported cost pressures.

While still at a 14-year high, inflation eased for the first time in eight months in October when Singapore’s core consumer price index (CPI), the central bank’s favored price measure which excludes private transport and accommodation, rose 5.1% year-on-year, slightly lower than the 5.3% recorded in September. Headline inflation came in at 6.7%, lower than the 7.5% recorded in September.

Last month, the MAS said that inflation is expected to remain elevated in the next few quarters before “slowing more discernibly” in the second half of 2023 as the current tightness in the domestic labor market eases and global inflation moderates, MAS forecasts next year’s headline inflation to average 5.5% to 6.5% while the core gauge is expected to be around 3.5 to 4.5%.

As for 2022, both measures are expected to average around 6% and 4%, respectively, well above the 2% core inflation rate the MAS regards as generally reflective of “overall price stability.” Full-year GDP for 2022, meanwhile, is expected to reach 3.5%, revised downward from an earlier forecast of 3% to 4% and a significant slip from the 7.6% growth hit in 2021.

Delayed due to economic uncertainty amid the Covid-19 pandemic, a goods and services tax (GST) rate hike from 7% to 8% will take effect from January, followed by a further rise to 9% in 2024. Analysts have warned the tax increase will add to inflationary pressures in the city-state, which was recently listed as the world’s most expensive city alongside New York City.

A recent online survey conducted by consumer research company Milieu Insight and expense tracking app Seedly found 95% of Singaporeans are “very” or “somewhat” concerned about inflation. Eight in 10 said their personal financial situations had been affected, while 71% of respondents said the rising cost of living had mostly impacted spending on necessities.

China’s post-pandemic reopening may also prove to be a double-edged sword, with analysts concerned that its eventual economic rebound could lead to a rush of consumption and travel with the potential to drive up commodity prices and perpetuate high inflation into next year, an outcome that would complicate efforts by central banks around the world to tame prices.

“If China bounces back very strongly and can take the reopening without straining their healthcare system,” said CIMB’s Song, “we may see on the flip side stronger Chinese demand that leads to perhaps a rebound in commodity prices, whether it is oil, metal or other soft commodities, then it may add on to inflation and inflation worries again just as we see global demand cooling.”

The Monetary Authority of Singapore is moving aggressively to contain inflation. Photo: iStock / Getty Images

If Singapore tips into recession, economists say the downturn could be relatively shallow because of offsetting support from the domestic services industry and tailwinds from recovering air transport, accommodation, hospitality and other sectors. “On the services side, quite a handful are still seeing very resilient end-of-year demand,” notes senior economist Song.

“We clearly know where the slowdown is happening and it’s likely to slow down further on the export-oriented goods-producing side. How that impacts output and production activities in Singapore will really depend on how severely global demand cools down, whether we see a mild recession or a sharper and deeper one. Services are, for now, still providing enough lift.”

“Transportation will continue to recover, probably still for months to come with aviation finally getting back on its feet. We clearly will see Changi Airport be busier. But we’ll probably see the seaport being quiet, for instance. We clearly will see hotels and hospitality still on the mend, but trade and trade financing might be softer,” Song told Asia Times.

Follow Nile Bowie on Twitter at @NileBowie