After another cut in Singapore's GDP forecast, what could happen next?

SINGAPORE: After policymakers slashed growth projections for the second time this year, Singapore is now anticipating its slowest full-year growth in a decade.

The Ministry of Trade and Industry (MTI) on Tuesday (Aug 13) said the economy will likely grow at between 0 and 1 per cent for 2019, with gross domestic product (GDP) falling in the middle of that range. 

This downgrade comes just three months after the forecast range was narrowed to 1.5 to 2.5 per cent in May.

According to Bloomberg data, the last time Singapore’s full-year growth went below 1 per cent was in 2009.

Economists said the sharp downgrade on Tuesday is hardly a surprise, given the weaker-than-expected growth in the first half of the year and an increasingly challenging external environment.

Top on the risk-list is the protracted trade spat between United States and China, with tensions heating up yet again last month after the former announced tariffs on another US$300 billion of Chinese imports.

“The escalation in US-China trade tensions means Singapore’s exports are likely to remain weak for some time,” said ANZ’s head of Asia research Khoon Goh.

Private investment is set to contract further as firms put off capital expenditures, while households will curb spending, added Mr Goh who now expects 0.4 per cent growth for the Singapore economy in 2019.

Other downside risks include a slowing China economy and Brexit, though new uncertainties have emerged such as the trade dispute between Japan and South Korea and political unrest in Hong Kong, noted economists.

“We see (second-half) growth remaining soft at 0.3 per cent year-on-year, which is only half the pace of (first half’s) growth amid the macro headwinds,” said OCBC’s head of treasury and strategy Selena Ling.

TECHNICAL RECESSION COMING?

Economists diverged, however, on whether a technical recession is around the corner. 

A technical recession is defined as two straight quarters of quarter-on-quarter contraction. Tuesday’s second-quarter data showed the economy shrank by 3.3 per cent on a seasonally adjusted and annualised quarter-on-quarter basis.

Among the earliest to sound the risks of a technical recession, Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye are expecting another quarter-on-quarter contraction in the third quarter.

Referring to MTI’s latest downgrade as a “pessimistic but realistic forecast which factors in a recession outcome”, they wrote: “We are penciling in a technical recession in third quarter given the escalating US-China trade war, compounded by the Japan-Korea trade spat and Hong Kong crisis.”

Economists from DBS, UOB and Standard Chartered think otherwise.

Explaining why the economy could avert a technical recession, DBS senior economist Irvin Seah said: “Beside the expectation of a technical payback, importers could potentially front-load their orders ahead of the next round of tariffs. This could see some marginal bounce back in export sales.”

However, Mr Seah noted that the debate on whether Singapore will dip into a technical recession is “entirely meaningless”.

Even with a positive sequential growth in the third quarter, it will not be enough to offset the sharp drop in the previous quarter, judging from the fragile economic conditions, he added. 

MAS EASING IN OCTOBER?

During the GDP press briefing on Tuesday, Mr Edward Robinson, the deputy managing director of the Monetary Authority of Singapore (MAS), dispelled recent market speculation that the central bank could make a move outside of its usual policy cycle.

But the stage is set for MAS to loosen policy at its next scheduled meeting in October, market watchers said.

Mr Edward Lee, chief economist for ASEAN and South Asia at Standard Chartered Bank, cited how core inflation has come in lower than expected in recent months, though it is still expected to stay within the central bank’s forecast range of 1 per cent to 2 per cent.

Echoing that, Barclays economist Brian Tan wrote in a note: “We think the economic outlook will likely be darker by October than the MAS had envisioned in April, which should also portend weaker inflation pressures. Labour market conditions appear to have softened further in the second quarter.”

He added: “With first-half GDP growth likely falling well short of the authorities’ expectations, the economic outlook darkening and the output gap set to slide into negative territory, we continue to expect the MAS to reduce the slope of its official SGD NEER (Singapore dollar's nominal effective exchange rate) policy band by 50 basis points to an estimated 0.5 per cent in October.”

Instead of setting interest rates, the MAS operates a managed float regime for the Sing dollar, allowing the exchange rate to fluctuate within an unspecified policy band. It changes the slope, width and centre of that band when it wants to adjust the pace of appreciation or depreciation of the local currency. 

To be sure, economists are not ruling out the possibility of more aggressive easing if data for the consecutive months turn out to be worse than expected. 

“Should the growth and inflation outlook weaken by more than expected in the lead-up to the October meeting, then a shift to neutral will be increasingly likely,” said ANZ’s Mr Goh, who also has a 50-basis-point easing as his “central case”.

FISCAL STIMULUS AS WELL?

Economists also threw up the possibility of fiscal stimulus given the downside risks.

OCBC’s Ms Ling thinks that “a fiscal policy response is likely forthcoming, possibly in the form of targeted help for businesses, especially (small- and medium-sized enterprises), and workers”, in the sectors that have thus far seen the biggest slowdown.

Sharing similar sentiments, Maybank Kim Eng economists also expect stimulus measures to help cushion the downturn and support SMEs, especially those in manufacturing and trade-related services.

They also suggested that the Government consider deferring the foreign labour quota cuts scheduled for next year, while relaxing some of the property cooling measures.

Mr Seah, who thinks the “chance is high” for both monetary and fiscal policies to turn more accommodative”, is calling out for a “robust fiscal Budget early next year”.

On why he does not expect a counter-cyclical fiscal stimulus package in the near term, the DBS economist explained that the economy "is not at risk of a full recession yet".

"The Government can afford to keep its powder dry and be more calibrated on the policy front at the moment," he said. “The key is to be prepared should the situation deteriorate sharply and warrant a more forceful policy response."