MTI slashes GDP forecast for 2020 amid Covid-19 outbreak, with possible full-year recession on the cards

SINGAPORE — The Ministry of Trade and Industry (MTI) has slashed Singapore's economic growth forecast for 2020 amid the Covid-19 outbreak, with a possible full-year recession on the cards.

In a press release on Monday (Feb 17), the MTI downgraded its gross domestic product (GDP) growth forecast to between -0.5 per cent and 1.5 per cent, with overall growth to come in at around 0.5 per cent.

Its previous forecast was between 0.5 and 2.5 per cent.

“However, as the Covid-19 situation is still evolving, there is a significant degree of uncertainty over the length and severity of the outbreak, and hence its overall impact on the Singapore economy,” said Mr Gabriel Lim, permanent secretary for the ministry.

The downgraded forecast comes as MTI reported a 0.7 per cent expansion in Singapore’s economy for the whole of 2019, which is slower than the 3.4 per cent growth in 2018, as declines in the manufacturing sector weighed down the economy. This confirmed the preliminary estimate for 2019 released in January.

On Friday, Prime Minister Lee Hsien Loong said that the economic impact of the Covid-19 outbreak was already bigger than in 2003, when Singapore was hit with an outbreak of the severe acute respiratory syndrome (Sars).

Mr Lee also said that a recession was possible.

However, Ms Yong Yik Wei, director of the economics division at MTI, emphasised to reporters during a press conference on Monday that the ministry is not projecting a full-year recession for 2020.

The last time Singapore registered a full-year contraction of its economy was in 2001 after the dot-com bust, when economic growth declined by 1 per cent. In the dot-com bust, many internet-related stocks, which had soared in value, then crashed as investors were worried that the businesses were not making money.

When Singapore was hit by Sars in 2003, the ministry said that full-year growth was 4.5 per cent. The economy shrank 0.3 per cent in the second quarter of that year, which corresponded with the months that Sars was battering Singapore.

While there was a sharp V-shaped rebound after Sars, Mr Lim said he does not know if this same rebound will happen this time.

TRADE, GEOPOLITICAL TENSIONS ADD TO GLOBAL UNCERTAINTIES

MTI warned that if the Covid-19 outbreak is more widespread, severe and protracted than expected, there could be a sharper decline in global consumption, as well as more prolonged disruptions to global supply chains and production.

Trade tensions between the United States and China, as well as geopolitical tensions in the Middle East also add to the global uncertainties.

"Against this backdrop, the outlook for the Singapore economy has weakened since the last review in November," said MTI.

The Covid-19 outbreak is expected to affect outward-oriented sectors such as manufacturing and wholesale trade due to the weaker growth outlook in several of Singapore’s key final demand markets, including China.

In addition, firms in these sectors could be affected by supply chain disruptions arising from prolonged factory closures and labour shortages in China as a result of the measures implemented by the Chinese government to contain the outbreak.

The outbreak has also led to a sharp fall in tourist arrivals, particularly from China, to Singapore. This has badly affected the tourism sector, said MTI.

Domestic consumption in Singapore is likely to decline as locals cut back on shopping and dining-out activities. This will adversely affect firms in segments such as retail and food services. 

MTI also said that the Covid-19 outbreak is likely to dampen growth prospects of China and other affected countries in 2020.

In China, growth in GDP for 2020 is expected to come in lower than earlier projected due to a pullback in household consumption as a result of the lockdowns and travel restrictions implemented in several major Chinese cities to contain the spread of the virus, said MTI.

Industrial production has also been disrupted because of work stoppages and delays arising from these containment measures.

"These developments in China will, in turn, have a knock-on impact on regional economies, including the Association of Southeast Asian Nation (Asean) economies, through lower outbound tourism and other import demand from China, as well as disruptions to supply chains," read the statement.

Other regional economies directly affected by the outbreak, such as Japan, Thailand and Malaysia, may also experience a drop in domestic consumer sentiments, and hence private consumption growth, noted MTI.

WHAT ECONOMISTS HAD SAID

Earlier this month, Maybank Kim Eng and DBS cut their 2020 full-year growth forecasts for Singapore’s economy.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said the bank is slashing its forecast to 1.1 per cent, a sharp drop from 1.8 per cent previously, as border control measures as well as the viral outbreak itself affect the hospitality, travel and retail sectors. Likewise, DBS downgraded its forecast to 0.9 per cent from 1.4 per cent previously.

The DBS report by its senior economist Irvin Seah noted that the impact of the Sars outbreak was mainly felt in the second quarter of 2003. GDP shrunk by 0.3 per cent year-on-year during the quarter but growth recovered swiftly in the subsequent quarters. Overall, Singapore managed to post a 4.5 per cent expansion in 2003, due to strong performances from the wholesale and retail trade, and financial services.

Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said that the outbreak had caused a “triple whammy” scenario, with manufacturing and wholesale trade affected due to supply chain disruptions and slower demand from key markets, a sharp falloff in the tourism and transport sectors, as well as declines in domestic spending.

“At this juncture, the uncertainties over the duration and extent of the Covid-19 outbreak imply it is still too early to call for a recovery in the second half of 2020,” said Ms Ling.

Should the outbreak turn out to be severe, Ms Ling expects Singapore’s economy to not register any growth for 2020.

Mr Brian Tan, economist at Barclays Bank, said that some weakness will still persist in the second half of 2020, even though the brunt of the impact would likely have subsided by the second quarter of this year.

Mr Tan expects recession to hit Singapore with this outbreak, as he projects the economy to contract by 0.4 per cent for the full year, which is near the bottom end of the MTI forecast range.