GDP to shrink 6.5% in 2020

UOB expects the economy to slow to a 5.2% contraction in Q4.

Singapore’s full-year gross domestic product (GDP) is now expected to shrink by 6.5% for the full year of 2020, down from the initial outlook of a 5% decline, according to estimates by UOB Global Economics & Markets Research.

The worsened outlook came after the third quarter disappointed with a 7% contraction compared to Q3 2019—although GDP grew 7.9% QoQ compared to Q2. With the latest GDP print, Singapore’s economy has fallen by 6.9% in the first three quarters of the year.

Given the rate of recovery, the Lion City’s GDP is assumed to clock -5.2% YoY in Q4.

The improvement in Q3 GDP was led by the phased re-opening of the economy following the circuit breaker implemented between 7 April and 1 June.

The overall GDP decline was dragged by sustained softness in the construction and services sector. Specifically, the construction sector fell 44.7% YoY in Q3 given the slow resumption of construction activities amid reports of fresh COVID-19 infections in the foreign worker dormitories.

The services sector also contracted 8% YoY in Q3, as aviation and tourism-related sectors such as air transport and accommodation stayed lacklustre.

“We note that the very nature of the pandemic is fluid and it could still be more severe and protracted than anticipated. The pace of the recovery has been hampered by the continued softness in the construction sector amid a non-existent tourism demand which further dragged the services sector. With the downside surprise,” Gain said in a note.

Assuming that the pace of recovery can be sustained into 2021, Singapore’s GDP will revert to positive growth rates by then. Gan estimates that GDP will grow by 5% in 2021, up from our prior outlook of 4.5%.

However, despite the recovery, real GDP in SGD terms will likely be lower than pre-COVID-19 levels. In the same vein, UOB’s econometric models suggest that the contraction pace in Singapore’s services and construction sectors will decelerate further in the last quarter of 2020, whilst manufacturing growth in Q4 should improve amidst a low-base print in Q4 2019.

Further, given their view of the recovery into 2021, UOB expects that the Monetary Authority of Singapore (MAS) will keep policy-parameters unchanged in its April 2021 meeting. MAS had kept its policy rate unchanged in its October review.