The sell-off across Asian markets took a small breather after United States President Donald Trump said yesterday that China is ready to come back to the negotiating table.
But the region, which had been pummelled by a rout in Hong Kong stocks following increasingly violent protests and worries over its economy, remained firmly in the red. Markets in Japan lost the most, falling 2.17 per cent, followed by Hong Kong, Taiwan and South Korea. Singapore and Thailand each shed 1.45 per cent, while Malaysia and Jakarta were down more than 0.55 per cent.
The regional sell-off was also fuelled by an escalation in trade tensions over the weekend. President Trump "ordered" US companies to stop doing business in China and raised existing and planned tariffs on Chinese imports by another 5 percentage points. This, after China last Friday announced plans to impose additional duties on US$75 billion (S$104 billion) worth of American goods on Sunday and on Dec 15. This means that by the end of the year, essentially all US$550 billion of Chinese imports to the US will be subject to duties.
The yuan fell to new 11-year lows, while safe-haven assets like gold rose to around US$1,532.69 an ounce yesterday, a level last seen in April 2011.
While Singapore's manufacturing output last month held up better than expected with just a 0.4 per cent decline from a year ago, economists say it is premature to call this an export recovery as it could reflect front-loading on expectations of an escalating trade war.
Singapore may be starting to see some small gains from trade diversion, similar to Taiwan where semiconductor production surged in the past two months due to larger US orders, Maybank Kim Eng senior economist Chua Hak Bin said.
"But trade destruction outweighs any small gains from trade diversion for Singapore. This next wave of tariffs in September is going to hit personal computers, clothes and shoes. But the tariff wave in December will be more destructive because it will hit laptops and smartphones. Singapore is a key part of the global electronics supply chain. If demand drops for smartphones and laptops, clearly we will be hit harder," Dr Chua said.
Many economies including those of Singapore, Hong Kong, South Korea, Japan and Germany are already on the brink of recession, he noted. But Vietnam, Thailand and Malaysia are cushioned by trade diversion and investments as a result of a reconfiguration of supply chains out of China. "Our forecast pencilled in a technical recession for Singapore. We are now trying to figure out if the downturn will worsen in the fourth quarter this year, and persist next year," Dr Chua added.
CIMB Private Banking economist Song Seng Wun said the extent of the downturn here will depend on how much more the trade war will escalate, pointing out that the higher tariffs are yet to take effect. "If higher tariffs kick in at the end of the year, that could impact Singapore's GDP further in 2020," said Mr Song.
"While the escalation in the trade war could shave off half a percentage point in global growth by 2020, it is likely to be much more for Singapore, a small open economy that's very dependent on trade. So that could translate to more than 1 percentage point cut in Singapore's GDP growth by 2020," he added.
Meanwhile, escalating anti-government protests in Hong Kong added to investors' jitters.
"But any time there is trouble around the region, Singapore's safe-haven status is confirmed. No doubt Hong Kong is a financial hub. But what can't be done there, can be done elsewhere. And because of what's happening in Hong Kong, there may be MNCs looking to relocate to Singapore," Mr Song said.