SINGAPORE - Singapore cut its forecast for economic growth this year on Tuesday (Aug 13), as the economy almost came to a standstill in the second quarter amid escalations in global trade tensions and a struggling manufacturing sector.
Analysts said the downgrade was a gloomy but realistic one given Singapore’s sensitivity to global trade flows – which have been dealt a blow by the US-China trade war – although they remained divided on the potential of a technical recession in the coming months. A technical recession refers to two consecutive quarters of decline in economic output.
The Ministry of Trade and Industry (MTI) now pegs Singapore's full-year growth at between 0 per cent and 1 per cent, with growth expected to come in around the midpoint of the forecast range. It previously narrowed downwards the forecast range to 1.5-2.5 per cent.
For the second quarter, the economy grew by just 0.1 per cent - in line with MTI's flash estimates last month, but slightly below the 0.2 per cent growth tipped by economists in a Bloomberg poll.
It is the slowest expansion Singapore has seen in a decade, since the economy contracted 1.2 per cent year-on-year in the second quarter of 2009.
The economy shrank 3.3 per cent quarter-on-quarter as well, marking a reversal from its 3.8 per cent growth in the first three months of the year.
“The lower-than-expected shift in the official forecast reflects the potential downside risk to growth, given the possibility of further trade actions from US President Donald Trump,” DBS senior economist Irvin Seah told The Straits Times, referring to Washington’s recent threat of an added 10 per cent tariff on the remaining US$300 billion (S$416.4 billion) in Chinese imports.
“This US$300 billion (of imports) covers a large proportion of electronic products, and definitely will affect the value chain that Singapore is deeply plugged into,” he added.
The manufacturing sector in Singapore has taken a hit since the US and China slapped tit-for-tat tariffs on each other in a trade war that has been escalating since last year.
Maybank Kim Eng economist Chua Hak Bin added that Singapore’s downgraded forecast is a “warning sign” for growth in the rest of the region, especially for countries that are also plugged into the global electronics supply chain.
Other uncertainties such as a potential worsening of the trade dispute between Japan and South Korea, as well as fallout from the unrest in Hong Kong, could also weigh on Singapore’s outlook, said Dr Chua.
On Tuesday, the Government slashed its full-year projection for key non-oil domestic exports (Nodx) as well, to between -9 and -8 per cent for the year, down from the range of -2 to 0 per cent, on the back of trade's continued dismal performance.
Nodx sank by 14.6 per cent compared to a year ago, a much steeper fall than the 6.4 per cent drop seen in the first quarter and Singapore’s third straight quarter of decline, Enterprise Singapore data showed.
Asked if Singapore’s monetary policy remained appropriate at this juncture, the Monetary Authority of Singapore’s chief economist Edward Robinson said its policy stance remained unchanged and it is “not considering an off-cycle policy meeting”.
He added that the MAS is monitoring current developments and will take them into account in the next scheduled policy review in October.
The rapid deterioration in Singapore's trade-reliant economic data has fuelled speculation that MAS will ease monetary policy, a move that could weaken the Singapore dollar and help exports.
Apart from a likely easing of monetary policy, Dr Chua said that if the economic situation worsens, the Government could target support measures at sectors that have been more badly hit, such as the manufacturing and export industries.
Mr Seah said that it is important for the authorities to step up communications with companies at this point to help mitigate the risk of mass retrenchments.
He added that they could also consider increasing the quantum of support for existing programmes such as the Professional Conversion Programmes which aim to help workers move into new sectors.
OCBC Bank's head of treasury research and strategy Selena Ling said: "A fiscal policy response is likely forthcoming, possibly in the form of targeted help for businesses, especially small and medium-sized enterprises, and workers, given that the Budget 2020 is only around six months away."
"Given that the current growth slowdown is concentrated mainly in manufacturing, especially electronics, and wholesale and retail trade, any fiscal assistance is unlikely to be broad-based at this juncture," she added.
Dr Chua expects quarter-on-quarter growth to remain negative in the third quarter but Mr Seah said this may not be the case in the coming months. Traders and importers have typically put in more orders before new tariffs kicked in, he said, and this could result in an uptick in numbers.
The main drag for the economy in the second quarter was manufacturing, which shrank 3.1 per cent from the previous year, much worse than its 0.3 per cent contraction in the previous quarter.
"Manufacturing output was largely weighed down by output declines in the electronics, transport engineering and precision engineering clusters," said the MTI on Tuesday. "By contrast, output in the biomedical manufacturing and general manufacturing clusters rose."
Singapore's wholesale and retail trade sector contracted by 3.2 per cent year-on-year as well, mainly due to wholesale trade, which shrank largely because of a decline in the machinery, equipment and supplies sub-segment. This was partly related to the fall in Singapore's non-oil domestic exports during the quarter, especially in electronics.
"Against this challenging backdrop, the Singapore economy is likely to continue to face strong headwinds for the rest of the year," Permanent Secretary for Trade and Industry Gabriel Lim told a press conference on Tuesday.
"In particular, the electronics and precision engineering clusters will likely remain weak due to the sharp decline in global semiconductor demand. The downturn in these clusters will also affect the wholesale trade segment," he said.
But he stressed that there remain areas of strength such as the aerospace and food and beverage manufacturing segments in manufacturing, and the information and communications as well as the finance and insurance sectors in services.
These were among sectors that saw growth in the second quarter, led by the finance and insurance sector at 5.2 per cent, followed by the information and communications sector at 4.1 per cent.
Construction grew as well, by 2.9 per cent, supported by public sector construction works, while transportation and storage expanded by 2.2 per cent with support from the air transport and water transport segments.
Although overall economic growth has slowed, Singapore's leaders have taken steps to reassure citizens that the authorities stand ready to help.
In his National Day message last week, Prime Minister Lee Hsien Loong noted that even as Singapore is experiencing an economic slowdown, which has hit the manufacturing sector and trade-related services, the Republic has experienced such slowdowns before and will take this one in its stride.
He added: "Should it become necessary to stimulate the economy, we will do so."
Last month, Deputy Prime Minister Heng Swee Keat said that a full-year recession was not on the cards for now.