Lacklustre manufacturing sector to weigh on Singapore’s economy in 2023: Economists

SINGAPORE: Manufacturing will likely be “the biggest drag” on the Singapore economy in 2023, as a slowdown in the sector continues amid weaker global demand, economists said.

But the services sector, riding on the tailwinds of reopening economies around the world, could offer some support for growth and jobs, they added.

Advance estimates released by the Ministry of Trade and Industry (MTI) on Tuesday (Jan 3) showed that the Singapore economy grew 3.8 per cent in 2022, a marked slowdown from the 7.6 per cent growth in the year before.

Fourth-quarter gross domestic product (GDP) came in at 2.2 per cent on a year-on-year basis, almost half of the 4.2 per cent growth in the previous quarter, as the key manufacturing sector contracted.

Manufacturing, which accounts for about one-fifth of the local economy, shrank by 3 per cent year-on-year in the three months through December. This marked the sector’s first contraction since 2020.

“Manufacturing momentum has been faltering in recent months, especially on growing global growth concerns and with the global electronics, especially semiconductor, industry also losing steam,” said OCBC Bank’s chief economist Selena Ling.

These headwinds will likely persist in the year ahead, alongside ongoing trade tensions between the United States and China.

The Biden administration in October announced new export curbs to cut off China’s access to high-end chips and chip-making equipment made with US technology – a move that Singapore has said could impact its semiconductor industry given how supply chains are highly complex and globalised.

“On a structural level, US-China rivalry on advanced manufacturing remains, so the implications for regional manufacturing supply value-chains is complicated,” Ms Ling said, adding that the “prognosis for the manufacturing sector remains lacklustre”.

Barclays senior regional economist Brian Tan noted that some clusters within manufacturing could benefit from industry-specific tailwinds. For instance, aerospace, which falls under transport engineering manufacturing, should see “some upside” from the recovery of air travel.

But as a whole, the outlook for the sector remains “soft” going into the first half of 2023, he said.

“It will probably be the biggest drag on the economy,” added Mr Tan. “There will also be impact on other trade-related services like wholesale trade that are tied to external demand.”

SERVICES TO OFFER SUPPORT

That said, the recovery in travel and tourism, especially on the back of the reopening of the China market, may offer some support for the economy.

“While the slump in manufacturing and regional trade activity will likely be a drag this year, we believe the recovery in international travel and tourism still has legs, especially at the pace that China is relaxing its pandemic restrictions, including border controls,” said Mr Tan, who downgraded his 2023 forecast for the Singapore economy to 2.1 per cent.

RHB senior economist Barnabas Gan is more optimistic. Pencilling in growth of 3 per cent, he noted that a “sustained recovery” in Singapore’s services sector will be the “bright side” that offsets key risks such as the decline in global trade demand and slowdown in manufacturing activities.

Maybank economists, who have kept their GDP forecast for this year at 1.5 per cent, said growth will be “uneven” as the manufacturing sector goes into recession while services continue to expand with the reopening and recovery in the hospitality, aviation, and consumer-facing sectors.

Policymakers have said they expect slower growth of between 0.5 per cent and 2.5 per cent this year.

With this outlook, the local job market is likely to “soften slightly but remain generally supported”, said Ms Ling.

“Manufacturing is traditionally not the key driver of local employment, so a further tapering of manufacturing growth momentum per se should not move the needle that much. The key job market driver is still the services sector, and China’s earlier COVID-19 policy pivot should be a boon,” she added.