Downgrading Singapore’s growth forecast
Advance estimates for second quarter Singapore GDP have surprised on the downside. The economy is projected to register a paltry growth of just 0.1% YoY, the weakest in ten years.
On the margin, that translates into a contraction of 3.4% (QoQ saar). Overall economic performance was way below market expectation (Consensus: 1.1% YoY, 0.5% QoQ saar). The manufacturing sector is already in a technical recession, with three consecutive quarters of sequential declines. Industrial output has continued to deteriorate amid the ongoing down-cycle in the electronics industry, persistent slowdown in China, and direct knock on impact from the trade war.
Another quarter of disappointment, which is likely judging from the hostile external environment and weak global demand, would push the manufacturing sector into an outright recession (i.e., full year contraction). Amid the external headwinds, the subpar performance in manufacturing did not come as a surprise. Note this sector accounts for about two-thirds of GDP and employment. Further weakness in the service sector would not only weigh down on growth but also hit the labor market squarely. Recent higher frequency data seem to suggest tougher times ahead for the services sector, particularly for the externally oriented segment.
Singapore average GDP growth for 1H19 is at a meagre 0.6% YoY. Our view is that the official GDP growth forecast for 2019 is likely to be lowered to 0.5-1.5% in August when the final 2Q figures are released. Even if there is a marginal upward revision to the services growth figures, it probably won’t make much of a difference. Moreover, risks in the external environment continues to cloud near term growth outlook. Despite the truce between the US and China, a resolution is unlikely in the near term.
Juxtaposed with the Middle East tension on Iran, and risk of a trade spat between the US and Eurozone, growth outlook has been gloomier than ever. An impending Fed cut may lift market sentiments but underlying global economic fundamentals remain weak.
Taking all these into account, our full year GDP growth forecast for 2019 has thus been lowered to 0.7%. This will be the weakest annual growth since the global financial crisis period (0.2% in 2009). And with the economic climate likely to remain challenging in the coming quarters, such sluggish growth momentum is expected to persist in the coming quarters. This essentially warrants a downward adjustment to next year’s growth projection.
Unless sentiment towards Asia sours materially, short-term SGD rates are biased lower in a Fed easing environment. We have been bullish on SGD rates for a while and are now broadly neutral after the sizable rally over the past few weeks. We now expect Singapore GDP growth in 2020 to average 1.8%, down from our previous forecast of 2.5%.
