Singapore economic growth slows to 0.1% in Q2, lowest in a decade

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SINGAPORE: Singapore’s economy grew by a meagre 0.1 per cent year-on-year in the second quarter, the lowest in a decade, according to official estimates released on Friday (Jul 12).

That widely missed economists’ forecasts of 1.1 per cent and was the lowest since the second quarter of 2009 when gross domestic product (GDP) contracted by 1.2 per cent, according to Bloomberg data.

The flash estimate, which is computed largely from data gathered in the first two months of the quarter, was also significantly weaker than the revised 1.1 per cent growth in the first three months of 2019

On a quarter-on-quarter seasonally adjusted annualised basis, Singapore’s GDP contracted by 3.4 per cent, way below the median forecast of 0.1 per cent in a Reuters poll and a reversal from the 3.8 per cent growth in the previous quarter. 

This marked the worst quarter-on-quarter performance since the third quarter of 2012, according to OCBC’s head of treasury research and strategy Selena Ling.

READ: As Singapore relooks 2019 projections, economists warn of possible technical recession

Manufacturing, which accounts for about one-fifth of the economy, was the main drag, said economists.

The sector extended a 0.4 per cent decline in the first quarter to contract by a much wider 3.8 per cent between April and June on a year-on-year basis. Output declines in the electronics and precision engineering clusters more than offset expansions in the rest of the manufacturing clusters, said MTI.

This underperformance was probably exacerbated by the trade impasse between the United States and China prior to last month’s Group of 20 meeting, and the possible kneejerk reactions in manufacturing supply chain activities following the US bans on Chinese technology giant Huawei, said Ms Ling.

In other parts of the economy, construction continued its turnaround on the back of an increase in public sector construction activities, albeit at a slower pace in the second quarter.

The sector grew by 2.2 per cent on a year-on-year basis, following a 2.7 per cent expansion in the previous quarter. The services producing industries expanded by 1.2 per cent on a year-on-year basis, unchanged from the previous three months, supported primarily by the finance and insurance sectors, other services industries, and information and communications sectors, said MTI.

TECHNICAL RECESSION AHEAD?

The worse-than-expected flash estimates for the second quarter hint at a much deeper slowdown than initially thought, with little chances of a turnaround in the rest of the year, economists said.

For one, there remains no certainty of a US-China trade deal and the conflict has since widened into the technology space, further exacerbating downside risks, said Maybank Kim Eng economist Lee Ju Ye.

Even if there is a deal given how the world’s two biggest economies have agreed to restart negotiations last month, that might only be finalised in the final quarter of 2019.

“We don’t think there’s any optimistic factor in the third quarter … so we are looking at a continued decline in manufacturing into the third quarter. Outlook for exports isn’t that great either given the trade disruptions,” Ms Lee said.

Already, non-oil domestic exports logged double-digit declines for the third straight month in May. The purchasing managers’ index, a key barometer of activity in the manufacturing industry, contracted for the second consecutive month in June.

READ: No quick turnaround in Singapore’s exports, more downside risks in 2019 growth: Economists

Economists are also not counting on services, which make up two-thirds of the economy, and construction to make up for the slack.

Given the grim global environment, Ms Lee reckoned that growth in external-oriented sectors within services, such as transportation and storage, and wholesale trade, will continue to weaken.

Any gains in construction are also unlikely to offset the softness in the economy, given that the sector accounts for just 4 per cent of Singapore’s real GDP, she added.

Echoing that, ING’s chief economist Robert Carnell pointed to “strong drivers” ahead for the decline in manufacturing.

“Singapore’s highly export-driven economy leaves it very exposed to the US-China trade war and the broader slowdown in world trade. Singapore’s concentration in the electronics sector during a global tech-slump and technology war also take a toll on the economy,” he wrote in a note.

“We don’t see any prospect for a substantial improvement in these areas any time soon, though the rate of decline could now be moderating. Nevertheless, the longer the manufacturing sector remains depressed, the more likely this weakness will spill over into services and other sectors.”

Several watchers of the local economy are hence pencilling in the odds of a technical recession – defined as two straight quarters of quarter-on-quarter contraction – by the next quarter.

“(The second-quarter flash estimates) brought first-half GDP growth to a paltry 0.6 per cent year-on-year, which is the weakest first-half growth since the first half of 2009, and clearly heightens the risk of a technical recession if growth momentum remains tepid going into the third quarter,” said Ms Ling from OCBC.

Ms Lee from Maybank Kim Eng warned that the latest growth numbers suggest a greater risk of a “deeper” technical recession by the third quarter, instead of the house’s earlier warning of a “shallow” technical recession.

Such a scenario will take a toll on the local labour market, with retrenchments in the manufacturing and trade-related services sectors likely to worsen, she added.

Also concerned about the labour market, Ms Ling pointed out that growth in the services sector has moderated sharply from the 2.9 per cent from a year ago period.

“Given the importance of the service sector as a jobs engine, we’re wary if this could start to impact hiring intentions if sentiments remain lacklustre into the second half, albeit the new DRC (Dependency Ratio Ceiling) measures from January 2020 may mitigate any fallout on this front,” said the long-time Singapore economy watcher, referring to the tightening of the foreign worker quotas announced during Budget 2019.

READ: Becoming less reliant on foreign manpower: Why is it so hard for Singapore’s F&B industry?

READ: Tighter foreign worker quotas in services sector ‘necessary’ to sustain restructuring, says Zaqy Mohamad

As for the full-year growth forecast that policymakers are looking to revise by next month, economists, such as Mr Brian Tan from Barclays and Mr Jeff Ng from Continuum Economics, expect that to be lowered to 1 to 2 per cent from the current 1.5 to 2.5 per cent. 

The most bearish revision forecast came from OCBC’s Ms Ling, who said a 0 to 1 per cent range “may be more realistic at this juncture”.

MAS TO THE RESCUE?

Given the sluggish growth prospects ahead, economists have raised their bets on the Monetary Authority of Singapore (MAS) to ease its exchange-rate based monetary policy in October when it holds its bi-annual meeting.

“With global trade still reeling from the effects of the trade tensions and broader slowdown in the global economy, downside growth risks remain,” said ANZ’s head of Asia research Khoon Goh.

Describing Singapore’s economy at a “standstill” in the second quarter, Mr Goh added: “Given below potential growth this year and the MAS core inflation expected to head towards 1 per cent year-on-year, we now expect the MAS to ease policy at their October review, reducing the slope of the policy band slightly to 0.5 per cent per annum from 1 per cent.” 

Agreeing, Mr Tan from Barclays said the risks have now shifted towards the MAS easing even more aggressively. 

“Potentially, we think the MAS could reverse all of its policy tightening from last year and reduce the slope to 0 per cent, especially if the third-quarter GDP reading implies a technical recession which is not our base case but cannot be ruled out,” he added. 

The Singapore central bank tightened monetary policy twice in 2018, before standing pat in April.

Some have even raised the possibility of an inter-meeting move.

“The numbers do show the impact of a few trade-related industries on overall GDP growth and it raises the chance that MAS will turn to a more dovish stance even before October, though it remains more likely to be October,” said Mr Ng.

The last time MAS surprised markets with an inter-meeting move was in January 2015, when it unexpectedly reduced the slope of its monetary policy band ahead of its April scheduled review on the back of a sharp drop in global oil prices.

Following Friday’s lacklustre economic data, the Singapore dollar fell as much as 0.1 per cent to 1.3588 against the US dollar but has since recovered mildly to last trade at 1.3579 as at 11.50am.



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