Technical recession risks heighten over dismal GDP growth

Economic growth declined to a mere 0.1% for Q2.

Singapore’s dismal GDP growth for Q2 2019 signals the heightened risk of a technical recession if growth momentum remains tepid for the following quarters, said Selena Ling, head of Treasury Research & Strategy, Global Treasury Division at OCBC Bank.

“So far, the manufacturing and electronics purchasing managers’ indexes (PMI) remain mired in contraction territory, whilst the Singapore PMI has also softened quite rapidly in the past two months. We suspect even if there is a US-China trade agreement materialising in the months ahead, it may not be sufficient to salvage the domestic manufacturing growth for 2H2019,” she said in a note.

HSBC’s chief economist for ASEAN, Joseph Incalcaterra, noted that the decline in manufacturing output in Q2 is nothing new - in fact, it's the third consecutive quarter of contracting manufacturing activity. “As a key semiconductor production centre, Singapore has been feeling the pain of a slowing tech sector for some time. However, today's GDP print tells us that high frequency data is set to continue deteriorating,” he said.

The Q2 print saw synchronised deterioration across all sectors: manufacturing, services, and construction. “Unfortunately, the advance print doesn't provide many details about the GDP subsectors, but it is likely that some domestically-oriented sectors slowed sharply. This tells us that these more resilient components of Singapore's economy may not be able to offset what has now been three consecutive quarters of weakening external data,” Incalcaterra added.

Although the services sector received a boost from finance & insurance, other service industries, and ICT industries, the 1.2% YoY growth pace still marks a sharp moderation from the 2.9% YoY seen this time last year, according to Ling. “Given the importance of the service sector as jobs engine, we’re wary if this could start to impact hiring intentions if sentiments remain lacklustre into 2H2019, albeit the new DRC measures from January 2020 may mitigate any fallout on this front,” she said.

Incalcaterra, on the other hand, said that the weakness in services activity may also reflect a deterioration in the labour market - which would increase the need for more monetary and fiscal policy support. “If hiring and wage growth slowed in Q2, it would reinforce the subdued trend in core inflation so far this year, tracking within the lower half of MAS's 1-2% forecast range. The advance 2Q labour market report will be released on 26 July - and will be a pivotal input for policymakers,” he said.

Both analysts also pointed to possible policy changes as Singapore’s growth prospects continue to dim. According to Ling, the odds of an easing (flatter SGD NEER slope or other options) may have risen. “A potential downward revision of the official 2019 growth forecast from 1.5-2.5% YoY would not come as a surprise, but the question is the extent of the downgrade,” she said.

According to OCBC, given weaker growth readings, a 0%-1% YoY range for 2019 growth may be more realistic at this juncture. “If a technical recession does materialise, we would also not rule out potential targeted stimulus as there is ample fiscal headroom,” Ling said.

HSBC’s Incalcaterra projects that MAS will deliver a 50bps reduction to the SGD NEER policy slope in the October 2019 policy meeting. “We also expect the government to announce a sharply expansionary FY2020 budget early next year,” he concluded.