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ECONOMY | Krisana Gallezo-Estaura, Singapore
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Is Singapore heading for a technical recession?

Singapore’s August IP is worse than expected.

With weaker-than-expected Industrial production for August, many analysts now argue that Singapore may be headed for a technical recession, or two consecutive quarters of contraction in gross domestic products. While this is likely to prompt renewed calls for policy easing by the Monetary Authority of Singapore, some analysts believe that the short-term manufacturing sector outlook matters less for the central bank.

Here’s what analysts had to say:

Francis Tan, analyst, UOB
The August IP data will be the last manufacturing number for the Ministry of Trade & Industry to take into account while they compute Singapore’s advance estimates for Singapore’s 3Q 2015 GDP (which could be released anytime between 12 to 14 October, in conjunction with the MAS October Monetary Policy review).
Putting August IP performance and our assumption of 3Q 15 services sector growth of 2.8% y/y together, this will imply that Singapore’s 3Q 2015 GDP may grow only 1.1% y/y. Translating that into a quarter-on-quarter seasonally adjusted growth measure, 3Q GDP may contract 0.41%, and satisfying the ‘condition’ of a technical recession1 (since 2Q 2015 GDP fell 4.0% q/q SAAR).
Even the government is sitting on the cautious side of the fence. During the 2Q15 GDP report, the Ministry of Trade and Industry (MTI) had narrowed their 2015 GDP forecast to 2.0% to 2.5%, from 2.0% to 4.0% earlier. Even if 2015 GDP eventually hits the upper end of the government’s forecast, this will mean that Singapore’s GDP will grow at the slowest rate since the global financial crisis in 2009 (GDP contracted 0.6% then).
 In August, the government’s trade agency had also narrowed and lowered their 2015 NODX growth forecast to 1% to 2%, from 1% to 3% earlier. The worse-than-expected IP will add to downside risks on economic growth and may nudge the Monetary Authority of Singapore (MAS) further towards dovish biasness in their consideration for their upcoming monetary policy decision next month. However, the risk of facing a technical recession is not a sufficient condition for the MAS to adopt a dovish policy mentality.
 What will push the central bank to dovish actions could really be the on-going risks of disinflation/deflation amongst our largest importing partners and the degree of the depreciation of their currencies with respect to the SGD. The dovish reactions by many central banks since the start of this year had further aggravated the decline in their respective currencies against the SGD, resulting in both a decline in Singapore’s export competitiveness, as well as the importation of global deflation onto Singapore shores, driving core inflation lower.
The deflationary environment that had been plaguing Singapore’s trading partners due to the lower oil and other commodity prices is exerting its impact not just on oil-related exports, but had spilled-over to non-oil related exports. If that continues, and with no signs of higher global oil and commodity prices, Singapore could be importing even more deflation onto our shores in the months ahead. This could warrant the MAS adopting an easier monetary policy.

BofA Merrill Lynch Global Research
A severe manufacturing contraction in August raises the likelihood significantly of a technical recession in the third quarter. Manufacturing is languishing, hurt by a prolonged period of weak external demand and domestic labor constraints.
Industrial production contracted a sharper 7% yoy in August, surprising on the downside, while the July print was revised even lower to -6.4% (from -6.1%). The August print is uglier when biomedical output, a volatile component, is stripped out. Excluding biomedical, IP contracted 8.1% yoy in August, vs. -4.6% in the previous month.
Most components fared worse in August, with transport engineering (-14.5%), electronics (-10.9%) and precision engineering (-9.2%) leading the declines. Chemicals grew a slower +3.7%, while general manufacturing contracted at a slower pace of 2%.

We are forecasting 3Q GDP at +1.0% yoy, much slower than the +1.8% in 2Q. On a quarter-on-quarter seasonally adjusted annualized basis, we see GDP contracting 0.9%, extending the 4% decline in the second quarter. We think the question should be shifting to whether this is a shallow or deep recession. Our sense is that the third quarter may not yet be the worst quarter.
We are downgrading our full year 2015 GDP growth forecast to 1.6% (from 2%), given a probable technical recession. This is lower than MTI's growth forecast range of 2-2.5%. We leave our 2016 GDP growth forecast unchanged at 2.2%.
Manufacturing output contracted 6.7% yoy over July-August, much weaker than the 2Q contraction of 4.8% (average). We see the September print staying almost as weak, bringing the 3Q average to about -6.5%. Manufacturing will likely continue to struggle, as suggested by recent China and other Asian countries PMI. Restructuring pains are acute, and a weak external environment is exaggerating the impact. The government has been reluctant to ease foreign labor quotas and restrictions, despite the challenging conditions faced by the sector.
We see services growth continuing to moderate in the third quarter. The nation's Jubilee 50th birthday celebrations may have provided a small boost, but is unlikely to fully offset the manufacturing weakness. Loan growth has been weak, property transactions slow and transport & storage indicators suggest sustained softness. Hazy weather conditions may have also impacted activity and tourism in September or late 3Q.
We expect the MAS to ease at the October policy meeting (date yet to be announced), in response to the probable recession and absence of inflationary pressures.Inflation is coming in at the low end of expectations. We expect the MAS to shift its current weak appreciation bias to a neutral (zero) bias and possibly re-centering the S$NEER band downwards. We think the 3Q flash GDP estimate - to be released by MTI at the same time as the MAS decision - will confirm a technical recession for Singapore, prompting the policy response. The MTI will also likely lower its GDP growth forecast range for the full year 2015, but will probably only do so upon the release of final 3Q GDP figures in November.
The MAS eased in a surprise move in late-January this year, reducing the slope of the NEER appreciation bias, and stood pat at the scheduled April meeting. The S$NEER index is currently trading at about 0.8% below the mid-point of the policy band, by our estimates.

DBS Group Research
I Industrial production figures [in August] will hint on the risk of a technical recession. The headline number is expected to dip by 6.8% YoY, compared to a 6.1% decline previously. On the margin, anything more than a 1.0% drop will essentially wipe out the gain in the previous month and push the economy closer to a technical recession. Indeed, judging from the poor export performance in August, the risk has risen significantly. Headline non-oil domestic exports slumped by 8.4% YoY, after a 0.7% drop in the previous month. This is significantly more than market expectation of a 3.5% decline. The ugliest part of the data set is the sequential month-on-month decline of 4.6% in NODX, which essentially wiped out the modest 0.2% gain in July. External headwinds arising from the deceleration in China’s growth was the key reason behind the dire outcome. PMIs of all key markets have also turned southwards while the knock-on effects from the equity market debacle in China and the impact of the yuan devaluation have yet to be fully manifested in the headline number. These factors essentially underscored the dicey global outlook and contributed to the slump in demand. The economy contracted by 4.0% QoQ saar in 2Q15, led by a 18.3% drop in manufacturing output. Another month of poor IP number will implies further contraction in the manufacturing sector and more disappointment on the growth front.

 

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