Singapore GDP (Q2, Advanced)

Sharp contraction, fiscal spending to support recovery

Singapore’s economy contracted by the most on record in Q2, but with many restrictions to economic activity now lifted and strong government support, output is set to rebound over the second half of 2020.
According to today’s advanced estimate, Singapore GDP shrank by 41.2% in Q2 on a q/q seasonally-adjusted annualised basis. (See Chart 1.) In year-on-year terms output fell by 12.6%. This was slightly closer to our more downbeat estimate than to the consensus forecast. (Bloomberg: -10.0%, CE: -15.0%.) A key thing to note is that the advanced estimate is based on the first two months of the quarter and is frequently subject to large revisions. The final reading will largely depend on how quickly activity rebounded with the easing of “circuit breaker” restrictions in June.
The manufacturing sector held up well, growing 2.5% y/y on the back of strong demand for pharmaceuticals. In contrast, the construction sector shrank by a massive 54.7%. With new infections still high among the foreign worker community which work in the sector, output is likely to take a long time to recover. Meanwhile, output fell 13.6% y/y among services producing industries.
Looking ahead, Q2 will mark the trough. The high-frequency data that we track show that domestic activity started to rebound once restrictions on work and leisure began to be eased at the start of June. (See Chart 2.) And while many industries, notably tourism and hospitality, will continue to suffer, the economy should rebound faster than others in the region.
The key reason for optimism is the huge size of the government’s stimulus package, which is equivalent to around 20% of GDP. This has supported businesses and households through the crisis, which should allow output to bounce back now that the economy is reopening.
Support measures, including tax deferrals, wage subsidies and working capital loans, has kept afloat many viable businesses that might otherwise have gone under. April data show that corporate insolvency filings fell after government support kicked in. Much of this support has been conditional on businesses retaining staff. And where jobs have been lost, the government has been proactive in providing retraining, which should help to minimise the scarring effects of the crisis on the labour market.
Meanwhile, household incomes have been propped up by cash handouts, tax rebates, utilities vouchers and other transfers. Individual bankruptcy filings have fallen sharply in the last three months. With many consumers sitting on a pile of involuntary savings from the lockdown and extra income from the government, consumption should rebound strongly. (See here.)
While we expect the economy to contract by 6% this year, it should rebound by 10% in 2021. Given that the advanced estimate for Q2 was slightly stronger than expected, the risks to our forecast are to the upside, but we will wait until the second estimate before making any revisions.