News analysis

Technical recession threat looming once again

Chances of real recession slim but pick-up also unlikely given global conditions: Analysts

The Singapore economy is flirting with a technical recession as worsening global conditions weigh on the outlook, especially in manufacturing.

While the chances of a real recession - a significant, sustained decline in activity across the economy - are slim, a pick-up is also unlikely given subdued global conditions and the lack of a strong growth driver, economists say.

A technical recession happens when an economy suffers two consecutive quarters of quarter-on-quarter shrinkage.

Singapore last went through one in the wake of the global financial crisis, when the economy suffered four straight quarters of quarter-on-quarter contraction.

Dismal manufacturing numbers released last Wednesday, which showed factory output sliding 6.1 per cent in July, prompted some economists to warn that the technical recession threat is once again looming.

Economists say that further signs of a technical recession could prompt the central bank to ease its stance of a modest and gradual appreciation of the Singapore dollar at its next meeting in October.

Manufacturing, which makes up a fifth of the economy, has been hit by restructuring, rising business costs and tepid global demand.

The sector was the main drag on growth in the second quarter, when the economy contracted 4 per cent over the preceding three months.

Economists' concerns that the pain will continue this quarter - and hence result in a technical recession - come amid a turbulent week for China, Singapore's largest trading partner.

For a technical recession to materialise, both the manufacturing and services sectors would have to weaken significantly in the coming months.

This looks unlikely for now but that could change if the global outlook worsens further or if Singapore is hit by a significant shock, economists say.

The probability of this is low but "rising as China-related market volatility and sluggish external demand growth continue to take a toll on business confidence and consumer sentiments", said OCBC economist Selena Ling.

For Singapore to enter a technical recession, there would have to be plunges across manufacturing clusters - in the output of volatile segments such as pharmaceuticals - as well as more pronounced falls in oil-related segments such as transport engineering, noted CIMB economist Song Seng Wun.

Though factories have not been performing well, "it would be extreme to expect all these segments to decline... (A technical recession) remains a high-risk, low-probability event".

The services sector - which makes up two-thirds of the economy and is typically less volatile than manufacturing - would also have to slow significantly to drag the economy into a technical recession, said UOB economist Francis Tan.

"Services usually only weakens during a crisis... However, more of our services are now exported, which means the sector's performance is also increasingly intertwined with the economic fate of the region."

Economists say that further signs of a technical recession could prompt the central bank to ease its stance of a modest and gradual appreciation of the Singapore dollar at its next meeting in October.

This means that all relevant data - including manufacturing output, inflation, job market numbers and global oil prices - will be "very closely watched" and speculated over in the run-up to October, said HSBC economist Joseph Incalcaterra.

"Growth expectations have deteriorated sharply since the beginning of the year," he said, noting that the slow growth and still-low oil prices are expected to continue keeping a lid on inflation.

The Monetary Authority of Singapore (MAS) uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and laying the foundations for economic growth.

A stronger currency helps to counter inflation by making imports cheaper in Singdollar terms, while a weaker Singapore dollar helps exporters whose goods become cheaper in foreign markets.

Whether the MAS decides to shift its policy will partly depend on conditions in the weeks before the meeting, said Mr Incalcaterra, who added that the central bank is "not in panic mode" despite recent market volatility.

A version of this article appeared in the print edition of The Straits Times on August 31, 2015, with the headline ' Technical recession threat looming once again'. Print Edition | Subscribe