Singapore closes 2023 on a high note as manufacturing output surges

Having commenced 2023 with weak economic momentum, the Singapore economy is closing the year on a high note. Manufacturing sector output showed a strong rebound of 7.4% year-over-year (y/y) in October 2023, after 12 consecutive months of year-over-year contraction. Singapore's non-oil domestic exports to China rose sharply in October, up 38.5% y/y, buoyed by non-electronics exports. Real GDP growth momentum improved to a pace of 1.1% growth year-over-year in the third quarter of 2023, compared with 0.5% y/y in the second quarter of 2023.

Singapore's international tourism arrivals have also rebounded strongly during 2023. The outlook for 2024 is for strengthening GDP growth, helped by improving manufacturing exports and continuing recovery of tourism exports.

Manufacturing sector output rebounds in October 2023

Latest statistics from Singapore's Economic Development Board (EDB) showed that manufacturing output rebounded strongly in October 2023. When measured on a month-on-month (m/m) basis, manufacturing output rose by 9.8% m/m.

A key factor driving the rebound in manufacturing output was the sharp upturn in electronics output, which rose by 14.8% y/y in October. Transport engineering output also rose strongly, up by 12% y/y, while biomedical manufacturing rose by 5.1% y/y. However, precision engineering output fell by 2.2% y/y while chemicals output showed a modest decline of 1% y/y.

Reflecting the weakness of manufacturing sector new orders since mid-2022, Singapore's non-oil domestic exports (NODX) fell by 3.4% y/y in October, although the extent of contraction moderated considerably compared with a decline of 13.2% y/y in September and 22.5% y/y in August, according to latest data released by Enterprise Singapore.

Exports of electronics products fell by 4.6% y/y in October compared with a decline of 11.6% y/y in September and a drop of 21.1% y/y in August. Exports of non-electronic products fell by 2.6% y/y in October, moderating compared with the steep decline of 13.7% y/y in September 2023.

Exports of non-electronic products to mainland China rebounded by 50.7% y/y in October, after rising by 34.7% y/y in September. This was a sharp turnaround from a decline of 19.5% y/y in August. This helped to mitigate the impact of declining electronic exports, resulting in total non-oil domestic exports to mainland China rising by 38.5% y/y in October after an increase of 26.2% y/y in September.

Non-oil domestic exports to South Korea remained weak, declining by 14.7% y/y in October after a decline of 29.2% y/y in September. Exports of electronics products fell by 7.4% y/y in October, while exports of non-electronic domestic products fell by 17% y/y.

Meanwhile exports to the US fell by 13.8% y/y in October 2023, with exports of electronics products rising by 2.3% y/y while exports of non-electronics products fell by 16.9% y/y.

Singapore economy improves in third quarter of 2023

According to the GDP statistics for Q3 2023 GDP released by Singapore's Ministry of Trade and Industry (MTI), Singapore's GDP growth rate was 1.1% y/y in the third quarter of 2023, improving on the 0.5% y/y in the second quarter of 2023. but much weaker than the 3.6% annual GDP growth rate achieved in 2022.

Measured on a quarter-on-quarter basis (q/q), GDP growth was up 1.4% q/q in the third quarter of 2023, much stronger than the 0.1% q/q growth rate in the second quarter of 2023.

Manufacturing output rose by 0.5% q/q in Q3 2023 compared with a contraction of 1.5% q/q in Q2 2023 and a decline of 4.5% q/q in Q1 2023. However, on a year-over-year basis, manufacturing output continued to show a significant contraction of 4.6% y/y in the third quarter of 2023, after declining by 7.7% y/y in the second quarter.

The construction sector remained a bright spot amongst the goods-producing industries, with output up by 6.3% y/y in Q3 2023, after a rise of 7.7% y/y in Q2 2023 and 7.9% y/y in Q1 2023.

The service sector also showed positive growth of 2.3% y/y in Q3 2023, compared with 2.8% y/y in Q2 2023, Services output was up 0.8% q/q in Q3 2023. The removal of many COVID-19 restrictions since April 2022 and improving tourism flows supported buoyant growth in the accommodation segment, which grew by 12.9% y/y in Q3 2023, after rising by 13.0% y/y in Q2 2023.

International tourism has rebounded during 2023, with total international visitor arrivals having reached 10.1 million for the first nine months of 2023 an increase of 171% compared to the same period of the previous year. The tourism rebound has been helped by strong tourism inflows from other APAC nations, notably Indonesia, Malaysia, India and Australia. There has also been a significant upturn in visitors from mainland China in recent months. The number of visitor arrivals is broadly on track to meet the Singapore Tourism Board's target of 12 million tourist visitors in 2023, about double the total tourism arrivals in 2022, which was estimated at 6.3 million.

Singapore's private sector expansion was sustained at a strong pace in October, according to the latest PMI data. Solid new business growth drove higher total activity.

The headline seasonally adjusted S&P Global Singapore Purchasing Manager's Index (PMI) posted 53.7 in October. Although slightly lower than the 54.2 reading in September, the latest reading continued to signal a solid expansion in private sector conditions. Moreover, this marked the eighth consecutive month in which Singapore's private sector economy expanded.

Inflation pressures have again increased

According to the latest S&P Global Singapore PMI survey, average input prices rose in October, reflecting higher input costs and wages. Furthermore, the rate at which average input prices increased accelerated to the joint-highest since May. Purchase prices rose as supply constraints worsened, which simultaneously led to a lengthening of lead times in October. Due to higher input prices, Singaporean private sector firms continued to raise their own output prices.

Singapore's headline CPI inflation rate rose to 4.7% y/y in October compared to 4.1% y/y in September, reflecting rising costs of private transportation due to higher car prices as well as increasing electricity and gas costs. The Monetary Authority of Singapore (MAS) Core Inflation measure rose to 3.3% y/y in October from 3.0% y/y in September.

Singapore's electronics output rebounds despite global 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. S&P Global survey data since mid-2022 indicates that the global electronics manufacturing industry is continuing to face headwinds from the weak pace of global economic growth.

The headline seasonally adjusted S&P Global Electronics PMI fell to 46.9 in October compared with 47.7 in September, continuing to signal contractionary conditions in the global electronics sector. New orders remained weak, with a reading of 45.0, still signalling contraction in global demand for electronics.

However, despite global headwinds, Singapore's electronics sector output has rebounded during September and October. According to data from Singapore's Economic Development Board, Singapore's electronics output rose by 12.7% y/y in September and by 14.8% y/y in October, although electronics output was still down by 4.6% y/y in the first ten months of 2023. Semiconductors output, which accounts for the largest share of total electronics production in Singapore, rose by 16.5% y/y in September and by 17.8% y/y in October, although posting a decline of 4.2% y/y for the first ten months of 2023.

Singapore's non-oil domestic exports of electronics continued to decline in October 2023, falling by 5.6% y/y according to exports data released by Enterprise Singapore. However, the pace of contraction moderated significantly in October compared to September. In October, exports of integrated circuits fell by 17.6% y/y, while exports of PCs fell by 22.9% y/y.

Exports of electronics products to mainland China remained very weak in October, declining by 12.8% y/y. Singapore's electronics exports to South Korea fell by 7.4% y/y. Electronics exports to the US rose marginally, by 2.3% y/y in October. However, electronics exports to Japan surged, rising by 52.8% y/y. Electronics exports to the EU showed a strong upturn, with positive growth of 14.5% y/y.

Singapore's economic outlook

After a second year of rapid economic recovery from the pandemic in 2022, economic growth momentum moderated significantly in 2023, although momentum has strengthened in the second half of the year. Annual GDP growth is estimated by S&P Global Market Intelligence to have slowed to 1.0% in 2023, a significant moderation in growth momentum compared with GDP growth of 3.6% in 2022 and 8.9% y/y in 2021.

According to the September 2023 Survey of Professional Forecasters produced by the MAS, the median GDP forecast for 2023 is for growth of 1.0%, significantly lower than the forecast from the June 2023 Survey, which was for GDP growth of 1.4% in 2023.

With continuing headwinds to global growth momentum due to weak growth in the EU and sluggish economic recovery in mainland China, the outlook for Singapore's manufacturing sector is still challenging. However, there are early signs of a rebound in electronics output. Stronger exports of services, notably due to rising international tourist arrivals, will help to support overall exports.

The increase in Singapore's Goods and Services Tax by 1% from 7% to 8% implemented on 1st January 2023 has also acted as a slight drag on economic growth in 2023, raising fiscal revenue by an estimated 0.7% of GDP per year.

In 2023, taking into account the 1% increase in GST from 1st January 2023, headline and core CPI inflation are estimated to average 5% and 4% respectively. The MAS and MTI note upside risks to the inflation outlook from potential shocks to global food commodity prices as well as if persistent tightness in the labour market keeps upward pressures on wage rises. In 2024, headline and core inflation are projected to average 3.0-4.0% and 2.5-3.5% respectively, according to MAS and MTI forecasts, with a further 1% increase in GST scheduled to be implemented in January 2024.

The medium-term outlook for Singapore's manufacturing sector is supported by a number of positive factors.

Despite near-term headwinds, medium-term prospects for Singapore's electronics industry remains favourable. 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. Singapore also remains an attractive hub for supply chain diversification for some high value-added segments of the electronics industry, as electronics manufacturers continue to diversify their supply chains for production of critical electronics products, notably semiconductors. Reflecting these trends, in 2022, Singapore attracted significant new foreign direct investment inflows into electronics manufacturing.

In the biomedical manufacturing sector, a number of 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 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 around 17% of the population, but this is projected to rise to 25% by 2030. This will result in rising healthcare and social welfare costs and could gradually reduce Singapore's long-term potential GDP growth rate. 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.

Rajiv Biswas, Asia Pacific Chief Economist, S&P Global Market Intelligence

Rajiv.biswas@spglobal.com

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