Singapore at risk again of technical recession: OCBC

At the pace industrial output has been contracting the possibility rises anew.

OCBC said the latest news of Singapore industrial output contracting by 2.2% yoy (-2.3% mom sa) was disappointing enough to force it to adjust its Q3 GDP growth forecast to 1.4% yoy (-0.3% qoq saar).

This "would put us in a technical recession, and the full-year 2012 growth forecast from our earlier 2.3% yoy to 2.0% yoy," said the bank, a risk that continues to grow as industrial output continues to display tepid growth tendencies.

Here's more from OCBC:

S’pore’s industrial output contracted 2.2% yoy (-2.3% mom sa) in August. August’s industrial production missed expectations, shrinking 2.2% yoy *-2.3% mom sa), versus a upwardly revised +2.5% yoy (-8.7% mom sa) in July. This was below market consensus for +1.0% yoy (0.0% mom sa) and our forecast for +1.0% yoy (+0.4% mom sa). The August data marked the first on-year contraction since April 2012, the largest on-year contraction since March 2012, and the second consecutive mom sa decline.

Heightened Q3 technical recession risk in store. The main drag was electronics which declined 7.3% yoy, whereas the biomedical cluster expanded 13.0% yoy, led by pharmaceuticals (+13.6%). Excluding biomedical manufacturing, industrial output would have fallen 5.4% yoy (-2.7% mom sa), implying that the broader manufacturing momentum remains weak. Note that the transport engineering cluster shrank 20.1% yoy in Aug, with the aerospace (-10% yoy due to a demand slowdown for engine repair jobs from US and Europe) and marine & offshore engineering (-27.2% yoy due to lower oil rig project contributions) segments offsetting the land transport segment growth (+34.5% yoy).

We revise down our Q3 and 2012 growth forecasts to 1.4% and 2.0% yoy. Given that both July and August manufacturing output data have continually undershot expectations, this has heightened the risk of a technical recession for Q3 GDP growth. Taking into account the very weak Aug manufacturing data, we have adjusted our Q3 GDP growth to 1.4% yoy (-0.3% qoq saar), which would put us in a technical recession, and the full-year 2012 growth forecast from our earlier 2.3% yoy to 2.0% yoy. This is still within the official 1.5-2.5% GDP growth forecast range, albeit it is below the median 2.4% growth forecast from the September MAS survey of professional forecasters.

What is the bearish scenario? In a bearish scenario where the Sep industrial output index remains at August’s tepid level, this could drag Q3 GDP to just +0.7% yoy (-3.0% qoq saar), resulting in full-year growth of just 1.8% yoy. This could open the door to some form of monetary policy accommodation in Oct, possibly a flattening of the SGD NEER slope, if there is no anticipated turnaround in the Q4 2012 and Q1 2013 outlook.

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