SINGAPORE – Singapore upgraded its 2021 growth projection on Wednesday (August 11) as its trade-reliant economy charted a stronger than expected recovery in the first half, a rebound that is projected to expand as the city-state looks to re-open more sectors and ease travel restrictions in the weeks ahead.

The Ministry of Trade and Industry (MTI) revised its gross domestic product (GDP) for this year to a range of 6% to 7%, up from the previous 4% to 6%, putting the island nation on track to boost economic output above pre-pandemic 2019 levels. While mainly sanguine on Singapore’s outlook, economists still see potential downside risks on the horizon.

The improved forecast came as the city-state announced it achieved a target of fully vaccinating 70% of its 5.9 million population by independence day on August 9, giving Singapore one of the best vaccination rates in the world as it transitions to treating coronavirus as an endemic disease and advances its so-called “Covid-resilient” nation status.  

“Today, we are vaccinating 1% of our population daily. A higher proportion of our population is now better protected. We are in a more resilient position. We can now look forward to a careful, step-by-step reopening of our economy. This is how we can move into the new normal,” said Prime Minister Lee Hsien Loong in a televised speech on August 8.

As a first step toward reopening, authorities eased restrictions on indoor dining and social gatherings on August 10, but only for fully vaccinated individuals. Singapore tightened safe distancing measures and imposed takeaway-only rules on food hawkers and restaurants in May-June and again in July-August after a modest rise in community cases.

Despite the curbs on consumer-facing sectors, GDP rose 14.7% year-on-year in the second quarter. But according to MTI, the strong rebound is largely due to the low base during the same period in 2020, when GDP fell by 13.3% due to “circuit breaker” lockdown restrictions and a sharp drop in external demand.

A worker sweeps a quiet alley along Boat Quay in Singapore on August 5, 2021. Photo: AFP / Roslan Rahman

On a non-annualized, seasonally adjusted basis, the economy contracted 1.8% from the previous three months during the second quarter, largely due to reimposed restrictions. MTI had initially projected a 2% contraction in the April-June period. GDP remained 0.6% below pre-pandemic levels compared to the second quarter of 2019.

Though growth in manufacturing, construction, and food and beverage (F&B) sectors all shrank quarter-on-quarter, performance year-on-year showed gains following the country’s worst recession since independence. Full-year GDP plummeted 5.4% in 2020 despite a total of S$92.9 billion (US$69.9 billion) in economic stimulus measures.

Sectors such as aviation, hospitality and tourism are still in the pandemic doldrums with the more contagious Delta variant ravaging neighboring Indonesia and Malaysia. Singapore’s broader recovery is expected to be supported by continued strong external demand for manufacturing exports and improving domestic consumption and investment.

Moreover, the rebound is on track despite a break from last’s year coronavirus-induced big state spending. Since its national budget was unveiled in February, the government introduced two comparatively minor spending packages worth a total S$1.9 billion ($1.4 billion) to help businesses and workers cope with the impact of tightened Covid-19 restrictions.

In a statement, MTI said a gradual recovery in the second half of the year, supported by eased domestic and border restrictions, would continue “barring a major setback in the global economy.” Quarantine-free travel for fully vaccinated individuals could be allowed from September and a quarantine-free travel corridor at a later stage, say authorities.

Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank, expects a full-year growth rate of 6.7% for 2021. “With the anticipated relaxation of restriction measures including dining-in, consumer spending and confidence is likely to improve. Manufacturing, especially electronics, is likely to sustain its momentum,” she said.

The manufacturing sector grew 17.7% year-on-year in the second quarter, with transport and precision engineering clusters recording the largest increases in output driven by global demand for semiconductors. Manufacturing activity marked its 13th consecutive month of expansion in July, with its Purchasing Managers’ Index (PMI) coming in at 51.

Quality control and packing of pharmaceutical products inside coldroom storage at the Zuellig Pharma facility in Singapore, January 20, 2021. Photo: AFP / Roslan Rahman

PMI readings, which gauge factory activity, above 50 indicate expansion. Singapore’s manufacturing performance contrasts with weaker results across much of Southeast Asia as the PMIs of Indonesia and Thailand fell last month. China’s PMI also fell in July as Covid-19 restrictions were tightened in two-thirds of its 31 provinces and municipalities.

Ling forecasts full-year manufacturing growth of more than 10% but expects to see a moderation to single-digit growth rates as low base effects subside amid signs that “growth momentum may have peaked in major economies” like the United States and China, Singapore’s largest foreign direct investor and largest trading partner respectively.

Yu Liuqing, a country analyst at the Economist Intelligence Unit (EIU), said that China’s recent Covid-19 uptick may have mildly dented domestic demand but will likely be brought under control, while sequential growth in advanced economies “remains strong and will benefit Singapore’s exports sector and manufacturing” as a whole.

“Broadly speaking, private consumption is recovering significantly and will be doing much better by the fourth quarter as authorities are expected to further loosen social restrictions. But the export sector is likely to outperform domestic sectors. A shortage of chips and solid demand for electronics products will continue to bolster domestic exports,” he said.

While Singapore has benefited from surging export demand, driven in large part by US consumers, spending on electronics and consumer goods amid the pandemic has put a major strain on global supply chains, a development that ironically threatens to weigh down growth as freight shipping rates reach record highs.

Container shipping prices from China to the US climbed over 500% from a year ago to over $20,000 since the start of August as retailer orders rise ahead of the peak shopping season. China-Europe rates have similarly climbed to highs of $14,000 per 40-foot container, a significant cost increase that economists say will trickle down to consumers.

“The cost of renting a container out from Shanghai to the rest of the world continues to climb and oil prices remain high. If freight rates continue to rise, price pressures will lead to reduced consumption that will take some of the wind out of the recovery,” said Song Seng Wun, an economist with CIMB Private Banking.

Boats sail past the PSA container terminal port in Singapore on August 11, 2021. Photo: AFP / Roslan Rahman

Another downside risk projected by MTI is that advanced economies’ reopening plans could be derailed in the second half of 2021 if “vaccination progress stalls due to vaccine hesitancy or if the efficacy of existing vaccines is weakened as a result of virus mutations or waning antibody levels.”

Singapore relies on the same Pfizer-BioNTech and Moderna vaccines used by advanced economies, and data points to gradually reduced rates of protection over time. Israel, for one, has begun giving elderly individuals a third Pfizer booster jab as daily cases this week rise to a six-month high to more than 6,000 amid a variant-fuelled fourth wave.

Reports indicate that previously immunized patients in Israel, which reached its high vaccination targets months ahead of Singapore, are months on less severely ill with Covid-19. But the precedent being set by its fourth wave and high caseload raises questions for Singapore as it pursues an endemic strategy and prepares to accept rising cases.  

Health Minister Ong Ye Kung told Parliament last month that having 200 or more cases a day may not be unusual in a situation where the Covid-19 is considered endemic. “Ours will be a step-by-step approach, feeling our way forward, making judgment calls,” said Ong as he further outlined Singapore’s four-stage reopening plan last week.

In doing so, he said Singaporeans must be “psychologically prepared” for the number of cases and deaths to rise once measures are further eased by early September when around 80% of the population is expected to be fully vaccinated, adding that authorities’ focus would be to “minimize the incidence of severe illnesses and deaths.”

Noting the rising number of Covid-19 cases worldwide, Trade and Industry Minister Gan Kim Yong told a press conference this week that there continues to be the risk of a new variant emerging and did not rule out measures to slow “down the pace of our opening […] if we assess that the healthcare system may be under stress.”

CIMB economist Song said that even with high global rates of infection and supply chain disruptions, businesses were coping and adapting. “Fortunately, the movement of goods still goes on, which is all-important for trade-oriented Singapore. The key question is to what extent we can adjust to a new normal where restrictions on in-person activities can be further eased,” he said.