ECONOMICS COMMENTARY — Feb 24, 2023
Singapore budget 2023 highlights impact of demographic ageing
By Rajiv Biswas
The Singapore economy recorded GDP growth of 3.6% year-on-year (y/y) in 2022, with quarterly growth momentum having moderated to 2.1% y/y in the fourth quarter of 2022. Singapore's Ministry of Trade and Industry (MTI) has maintained its GDP growth forecast for 2023 in the range of 0.5% to 2.5%.
The fiscal deficit for 2023 is expected to narrow to just 0.1% of GDP, after an estimated deficit of 0.3% of GDP in 2022. Additional revenue measures that will be implemented in 2023 include an increase in property taxes through a higher Buyers Stamp Duty for higher value owner occupied residential properties as well as for all non-owner-occupied residential properties and higher value non-residential properties. A further increase in property taxes is scheduled for 2024, in addition to a further 1% rise in the Goods and Services Tax (GST) to a new rate of 9%.
Singapore economy shows some moderation
Singapore's estimate for fourth quarter GDP for 2022 showed a moderation in the pace of growth to 2.1% y/y, compared with 4.0% y/y in the third quarter. On a quarter-on-quarter (q/q) basis, GDP growth slowed to 0.1% q/q in Q4 2022, compared with 0.8% q/q in Q3 2022.
Singapore real GDP growth
The service sector recorded a small contraction of 0.2% q/q in Q4 2022, although showing positive growth of 4.0% y/y. The gradual removal of many COVID-19 related restrictions since April 2022 supported buoyant growth in the accommodation segment, which grew by 7.8% y/y.
The headline seasonally adjusted S&P Global Singapore Purchasing Manager's Index (PMI) climbed from 49.1 in December 2022 to 51.2 in January. Rising above the 50.0 neutral threshold, the PMI signaled a renewed improvement in private sector conditions at the start of 2023.
S&P Global Singapore PMI
Manufacturing sector slowdown
Latest statistics from Singapore's Economic Development Board (EDB) showed that manufacturing output continued to weaken in December 2022, declining by 3.1% y/y. This reflected contraction in output of chemicals and biomedical manufacturing.
Chemicals output fell by 9.5% y/y in December, with petrochemicals output declining by 22.2% y/y due to the impact of both weak demand as well as plant maintenance shutdowns.
Output from the biomedical manufacturing segment fell by 20% y/y in December, with a 24% y/y drop in output of pharmaceuticals driving the overall contraction in biomedical manufacturing.
Singapore manufacturing output
Overall, total manufacturing output growth during 2022 was up 2.5% y/y. However, the electronics sector will face growing headwinds in the near term due to continued weakening growth momentum expected for the US and EU in 2023.
Inflation pressures
According to the December S&P Global Singapore PMI survey, input cost inflation rose at the end of 2022, attributed to higher purchase costs and wages. Cost pressures heightened with higher prices reported across a range of categories such as raw materials, transportation and energy, and was further aggravated by rising interest rates and currency conversion costs. Despite the rise in input costs, output price inflation fell according to latest survey indications. Firms continued to share their cost burdens with clients but at a slower rate in December so as to avoid further dampening demand.
Singapore PMI input costs and output prices
Singapore's CPI inflation rate eased to 6.5% % y/y in December from 6.7% y/y in November. The Monetary Authority of Singapore (MAS) Core Inflation measure remained at 5.1% y/y in December, the same pace as in October and November.
The MAS and Ministry of Trade and Industry (MTI) estimate that for calendar 2023, taking into account the 1% increase in GST that took effect on 1st January 2023, headline and core CPI inflation are projected to average 5.5%-6.5% and 3.5%-4.5% respectively.
Moderating global electronics demand adds to headwinds
The electronics manufacturing industry is a key segment of Singapore's manufacturing sector, accounting for 40% of the total weight of manufacturing output, dominated by semiconductors-related production. The latest S&P Global survey data indicates that the global electronics manufacturing industry is facing headwinds from the weakening pace of global economic growth.
The headline S&P Global Electronics PMI posted 48.9 in January, down from 50.1 in December 2022, to signal a deterioration in operating conditions across the global electronics manufacturing sector at the start of 2023. The latest data indicated a renewed contraction in the global electronics sector, reflecting further declines in new orders and output.
S&P Global Electronics PMI New Orders Index
The level of work outstanding at global electronics manufacturers declined for a seventh consecutive month at the start of 2023 and at the fastest rate since June 2020. Lower new orders and the easing of supply-chain constraints allowed firms to work through unfinished business, according to panellists. All four monitored sub-sectors recorded contractions in backlogs in January. Weakening economic growth momentum in the US and EU has impacted on consumer demand for electronics, with the economic slowdown in mainland China during the fourth quarter of 2022 also contributing to the downturn in new orders.
S&P Global Electronics PMI and New Orders Index
Singapore's economic outlook
The Singapore economy recorded a second year of economic recovery from the pandemic in 2022, growing by 3.6% y/y, after growth of 8.9% y/y in 2021. Singapore's GDP growth in 2022 was buoyed by strong growth in domestic consumption and an upturn in international tourism expenditure, as COVID-19 restrictions were progressively eased in Singapore as well as a growing number of other Asia-Pacific economies.
With increasing headwinds to global growth momentum in 2023 due to expected weak growth in the US and EU and current sluggish domestic demand in mainland China at the outset of 2023, the outlook for Singapore's manufacturing sector and some trade-related services is for weaker growth in 2023. However, with domestic demand in mainland China expected to gradually improve during 2023, this should help to mitigate the impact of slowing export orders for Singapore's manufacturing sector in the US and EU.
The increase in Singapore's GST by 1% from 7% to 8% implemented on 1st January 2023 will also act as a slight drag on economic growth, raising fiscal revenue by an estimated 0.7% of GDP per year. Singapore's Ministry of Trade and Industry has maintained its GDP growth forecast for 2023 in the range of 0.5% to 2.5%.
In 2023, taking into account the 1% increase in GST from 1st January 2023, headline and core CPI inflation are projected to average 5.5%-6.5% and 3.5%-4.5% respectively. MAS Core Inflation is projected by the MAS and MTI to remain elevated over the next few quarters, with risks still tilted to the upside, due to factors such as potential renewed shocks to world commodity prices and persistent global inflation pressures. Although prices of energy and food commodities have eased from their peaks, businesses will face higher utility prices and rising unit labor costs in the near-term. The MAS and MTI expect that MAS Core Inflation will moderate in the second half of 2023, as tightness in the domestic labor market eases and global inflation pressures moderate.
The medium-term outlook for Singapore's manufacturing sector is supported by a number of positive factors.
The medium-term global demand outlook for Singapore's electronics industry remains favorable. The outlook for electronics demand is underpinned by major technological developments, including 5G rollout over the next five years, which will drive demand for 5G mobile phones. Demand for industrial electronics is also expected to grow rapidly over the medium term, helped by Industry 4.0, as industrial automation and the Internet of Things boosts rapidly growth in demand for industrial electronics.
In the biomedical manufacturing sector, significant new manufacturing facilities are being built by pharmaceuticals multinationals. This includes a new vaccine manufacturing facility being built by Sanofi Pasteur and a new mRNA vaccine manufacturing plant being built by BioNTech.
The aerospace engineering sector is currently experiencing rapid growth as the reopening of international borders in APAC is boosting commercial air travel across the region. Singapore's role as a leading international aviation hub is likely to continue to strengthen over the medium-term, helped by strong growth in APAC air travel and its role as a key Maintenance, Repair and Overhaul (MRO) hub in APAC.
In the service sector, Singapore is expected to continue to be a leading global international financial centre for investment banking, wealth management and asset management. Singapore will also continue to be a key APAC hub for shipping, aviation and logistics, as well as an important APAC hub for regional headquartering.
However, an important long-term challenge for the Singapore economy will be from ageing demographics. In Budget 2023, the finance minister stated that a key issue for the Singapore economy over the medium to long term will be from demographic ageing, with Singapore having one of the world's fasted ageing populations. The proportion of Singapore's population that is currently aged over 65 years is one-sixth of the population, but this will rise to an estimated one-quarter by 2030. This will result in rising healthcare and social welfare costs and could gradually reduce Singapore's long-term potential GDP growth rate.
Therefore, a key focus of fiscal policy in Budget 2023 was on supporting seniors with healthcare as well as fiscal incentives for retirement savings. Measures to increase the retirement age have already been announced prior to Budget 2023, but additional measures to encourage greater participation in the workforce by seniors will be implemented. A number of measures to provide fiscal support to families with young children were also announced, including higher "baby bonus" payments and increased paternity leave. The role of fiscal policy in addressing demographic ageing will continue to be a key focus for government policy over coming years as the economic impact of demographic ageing intensifies.
Access the full press release here.
Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence
Rajiv.biswas@spglobal.com
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Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
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