Singapore economy treading on thin ice

Two-thirds of Singapore’s economy is already in technical recession and the worst is yet to come, says DBS Group Research.

With the release of detailed 2Q GDP data on Aug 11, Singapore has cut the top end of its 2016 growth forecast from 3% to 1-2%, after its economy expanded less than previously estimated on the back of a weakening global environment.

“A negative shock from the external environment could tip the economy into contraction,” warns analyst Irvin Seah in a Thursday report. Among other forecasts, Seah is predicting:

Bleak outlook for 3-4Q
DBS continues to expect a growth rate of 1.5% for the full year. That’s the slowest to be seen in Singapore’s economy over the last seven years. While the headline figure has averaged 2.1% y-o-y in 1H16, this was partly due to the low base in the same period last year.

Seah believes the opposite will occur in the coming two quarters since GDP accelerated in the 2H15. Such high base effect implies that in y-o-y terms, such that one can expect the headline figure to “fall sharply” in the next two quarters.

Slump in services sector
The services sector has notably registered two consecutive quarters of contraction. To Seah, this signals that Singapore is “technically” in a recession as the sector accounts for two-thirds of the economy.

“The bigger concern is that if the doldrums in the services sector persist, it could eventually drag the entire economy down,” says the analyst, who highlights the sector as the key driver of Singapore’s growth. “When the services sector turns, the economy follows. Plainly, risk of a contraction in GDP has risen,” he adds.

Manufacturing won’t save the day
In Seah’s view, there is no hope that manufacturing could pick up the slack in the services sector, given that manufacturing grew an average of just 0.3% y-o-y in 1H16. Its expansion was largely driven by the biomedical cluster. Without the spur of growth from biomedical which the analyst refers to as a “jab in the arm”, the manufacturing sector would have contracted overall by 2.7% y-o-y in the first half of the year instead.

MAS to maintain status quo
It is unlikely that the Monetary Authority of Singapore (MAS) will step in to further ease its monetary policy stance either, says Seah. The analyst points out that exchange rate policy was already eased to a zero appreciation of the NEER in April, despite the fact that headline figures had yet to show a contraction in the economy.

“In our opinion, the current monetary policy stance already served as a ‘cushion’ for the economy, and is appropriate under the current economy conditions,” he asserts. “The central bank will most likely stick to status quo in the upcoming policy review in October.”

This article first appeared in The Edge Singapore Market Report.

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