Could Singapore's economy be on a downturn again?

The current quarter may be impacted by a low base on imports.

Singapore's economic outlook for this current quarter is on the downside after the soft patch in Q1. According to a report from Deutsche Bank, economic growth could again decline due because of a low base on imports.

However, the report said underlying data continue to support improving macro fundamentals.

"Yes, the city-state’s economy contracted 0.3%qoq(sa) at the start of the year after expanding 2.9%qoq(sa) in the preceding quarter, paring off 20bps in its annual growth to 2.7%yoy (after having been revised 20bps higher from the advance estimate),” it said.

“Per our estimates, growth could continue to decline in the current quarter, pulled down by a low base on imports. However, it could again turn around in the second half, to record an average growth of 2.5% for 2017, a 50bps improvement from last year. The MAS, in its June report, also shares the view of above-2% growth this year, barring the realization of downside risks. We believe this development could pave for a modest monetary policy tightening in October.”

More so, the year-on-year growth moderated last quarter as manufacturing output slowed to 8.0%yoy from 11.5%yoy in the preceding quarter. Construction, on the other hand, continued to decline but to a lesser degree, down 1.4% YoY versus the decline of 2.8%.

"Looking beneath the data, it was the contraction of biomedical manufacturing output, a reversal from expansion in the preceding quarter, and a segment that tends be volatile, that drove the slowdown in the manufacturing sector," it said.

Here's more from Deutsche Bank:

Many of the first batch of Q2 indicators are out. And at first glance, some are also worrisome. Industrial production decelerated from 11.0%yoy in March to 6.7%yoy in April. However, excluding biomedical manufacturing, industrial output gained pace to grow 15.5%yoy in April from 13.5%yoy in March.

Note that while electronics accelerated and precision engineering sustained about the same growth, chemicals actually reverted to contraction while general manufacturing dropped more sharply. We will have to watch out for a few more data points to revisit our view.

The exports print in April also aroused concerns over Singapore’s near-term economic prospects. Non-oil domestic exports fell 0.7%yoy in April after expanding on double-digit rates two months earlier. The downturn was again largely due to the sharp drop in pharmaceutical shipments, while exports of electronics, petrochemicals, and others recorded weaker but arguably healthier rates of expansion of at least 5%yoy.

Likewise, PMI prints from two different survey bodies showed slight declines in April and May, but nonetheless continued to indicate an expanding manufacturing sector. Meanwhile, credit growth further inched higher in April, after bottoming out in late 2015.

On the domestic front, the condition is dull. Annual growth in retail sales had been on a decline since mid- 2015 in line with the slump in global trade. But it may have already reached a trough in February, finally turning around, albeit slowly, after a couple months of rebounds in exports and sustained increases in credit growth.

Wage growth has also been elevated in Singapore, settling between 3-4%yoy in the past two years before dropping to 1.9%yoy in Q1, while further growth in tourist arrivals, which were up 4.0%yoy in Q1 against 2.5%yoy in 2016Q4, could also provide support to the retail segment.

However, a skills mismatch in line with the ongoing economic transition is likely to place upward pressure on the unemployment rate and consequently weigh on consumer sentiment. As such, we expect only a modest turnaround in retail sales, to growth of about 5%yoy on average this year.