Singapore’s Economic Outlook: Navigating Challenges and Embracing Opportunities in the second half of 2023.
After a year of rapid economic recovery in 2022 following the pandemic, the pace of economic growth significantly slowed in early 2023.
The forecast for GDP growth in Singapore is expected to reach 1.8% in 2023, a decline from the 3.6% growth in 2022 and the impressive 8.9% year-on-year growth in 2021.
Global economic challenges, particularly weak growth in the US and EU, continue to pose headwinds to Singapore’s manufacturing sector in 2023.
However, there are promising indications of gradual improvement in domestic demand in mainland China, which could help mitigate the impact of slowing export orders from the US and EU on Singapore’s manufacturing sector.
Additionally, stronger exports of services, fueled by an increase in international tourist arrivals, will partially offset the effects of weaker growth in manufacturing exports.
The implementation of a 1% increase in Singapore’s Goods and Services Tax (GST) from 7% to 8% on January 1, 2023, will slightly impede economic growth in 2023 while boosting fiscal revenue by an estimated 0.7% of GDP per year. The Ministry of Trade and Industry in Singapore has maintained its GDP growth forecast for 2023 within the range of 0.5% to 2.5%.
Considering the GST increase, headline and core Consumer Price Index (CPI) inflation in Singapore are projected to average between 5.5% and 6.5%, and 3.5% and 4.5%, respectively, in 2023.
The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) anticipate that MAS Core Inflation will remain elevated in the coming quarters, with risks leaning towards upward pressures.
Factors such as potential shocks to global commodity prices and persistent global inflationary pressures contribute to this outlook. While energy and food commodity prices 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 MAS Core Inflation to moderate in the second half of 2023 as domestic labor market tightness eases and global inflation pressures subside.
Looking at the medium-term prospects, Singapore’s manufacturing sector benefits from several positive factors.
The electronics industry, in particular, shows a favorable outlook driven by significant technological developments like the rollout of 5G over the next five years, which will stimulate demand for 5G mobile phones.
The growth of industrial electronics is also expected to be rapid in the medium term due to Industry 4.0, where industrial automation and the Internet of Things drive demand.
Singapore remains an attractive hub for supply chain diversification in high value-added segments of the electronics industry, as manufacturers seek to diversify their supply chains, particularly for critical electronics products such as semiconductors. In 2022, Singapore attracted significant new foreign direct investment in electronics manufacturing.
In the biomedical manufacturing sector, pharmaceutical multinationals are constructing several new manufacturing facilities, including a vaccine manufacturing facility by Sanofi Pasteur and an mRNA vaccine manufacturing plant by BioNTech.
The aerospace engineering sector is currently experiencing rapid growth due to the reopening of international borders in the Asia-Pacific (APAC) region, which is boosting commercial air travel. Singapore’s position as a leading international aviation hub is expected to strengthen further in the medium term, supported by robust APAC air travel growth and its role as a key Maintenance, Repair, and Overhaul (MRO) hub in the region.
In the service sector, Singapore is poised to maintain its status as a leading global international financial center, particularly in investment banking, wealth management, and asset management. Singapore will also continue to be a significant APAC hub for shipping, aviation, and logistics, as well as an important regional headquarters location in the APAC region.
However, a significant long-term challenge for the Singaporean economy arises from its aging demographics.
In Budget 2023, the Finance Minister highlighted demographic aging as a key issue for the medium to long term, as Singapore has one of the fastest-aging populations globally.
Currently, one-sixth of Singapore’s population is aged over 65 years, a proportion projected to rise to approximately one-quarter by 2030. This demographic shift will result in increased healthcare and social welfare costs and could gradually reduce Singapore’s long-term potential GDP growth rate. Addressing the economic impact of demographic aging through fiscal policy will remain a key focus of the government in the coming years.
Source: S&P Global Market Intelligence