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Dispiriting Q3 stupefies market, underscores need for reforms

MAS leaves monetary policy untouched, keeping to neutral S$ policy band

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Just how critical the Committee on the Future Economy (CFE) is was underscored on Friday, after official data showed that Singapore's GDP grew only 0.6 per cent year-on-year in the third quarter - marking the slowest pace seen since the 2008/2009 global financial crisis.

Singapore

JUST how critical the Committee on the Future Economy (CFE) is was underscored on Friday, after official data showed that Singapore's GDP grew only 0.6 per cent year-on-year in the third quarter - marking the slowest pace seen since the 2008/2009 global financial crisis.

The dismal performance - which included larger-than-anticipated sequential contractions of 17.4 per cent and 1.9 per cent in the manufacturing and services sectors respectively - undershot even the most bearish of consensus forecasts, and left private-sector economists stupefied.

Forward-looking statements by the Monetary Authority of Singapore (MAS) did nothing to assuage the shock, either. Leaving their monetary policy stance unchanged, the central bank warned that expansion in the second half of 2016 is projected to be "a step-down" from the first.

"Growth in the Singapore economy has weakened and is not expected to pick up significantly in 2017," added MAS in its half-yearly monetary policy statement. With the downbeat outlook, several private-sector economists told The Business Times that they are keenly awaiting the CFE's report, since - as one analyst put it - this could be the languishing economy's "only saviour".

Said UOB economist Francis Tan: "If this were just a cyclical downturn, then we can just talk about monetary stimulus or fiscal stimulus. But this time, especially in the services sector, what we're seeing is a very slow and steady reduction in the positive growth rate over the past year - before it finally hit the contraction zone in Q3.

"So basically, we need to look at longer-term structural reforms . . . It's not just about proposing the next year of fiscal stimulus. The CFE is the only lifeline we can use, so that's why I'm eagerly looking forward to their recommendations."

Indeed, the central bank flagged the continuing shift in the composition of demand towards less import-intensive consumption spending. As a result, global trade this and next year will probably grow slower than initially expected.

The lacklustre global investment cycle, which has yet to show signs of an upswing, will also continue to weigh on the region's exports into 2017, MAS added. "Against this external backdrop, Singapore's trade-related sectors will continue to pose a drag on GDP growth in the quarters ahead. At the same time, the transport engineering and selected precision engineering clusters within manufacturing will be hampered further by weak demand for oil exploration and production equipment. Sea transport services will remain affected by the slowdown in trade within Asia. "In the domestic economy, softening economic sentiment and emerging slack in the labour market will weigh on the retail trade and real estate segments. In comparison, modern services, such as information & communications, and selected domestic-oriented sectors should continue to provide support to the economy, underpinned by government spending and robust demand for healthcare and education services."

The bleaker outlook, as well as Q3's dispiriting performance, prompted a fresh round of full-year forecast cuts. At least five banks lowered their 2016 growth projections, with revised estimates ranging from one per cent to 1.4 per cent growth (compared to earlier, more sanguine readings of 1.5 per cent to 2.2 per cent).

MAS, meanwhile, expects full-year GDP growth to come in "at the lower end of the 1-2 per cent forecast range" - a reiteration of earlier guidance from Deputy Prime Minister Tharman Shanmugaratnam and Trade Minister Lim Hng Kiang. With the downshift, at least five private-sector economists - from Bank of America Merrill Lynch (BAML), Citi, Mizuho, OCBC, and UOB - raised the need for more fiscal and CFE-related measures to support the economy and jobs.

Noted Mizuho economist Vishnu Varathan: "Crucially, the 'bluntness' of already-stretched monetary policy justifies far more expansionary fiscal stance with sharper relief for corporates. Cost containment - (such as) reduced levies and training or wage offsets - may be an enduring Budget theme given it not only defines 'real' struggles to be assuaged amid bottomline pressures, but also addresses longer-term cost competitiveness concerns."

BAML's Mohamed Faiz Nagutha also thinks that severely affected segments such as offshore & marine could get government support in the coming months; he believes that "the ball is now in MOF's (Ministry of Finance) court".

Others, such as OCBC's Selena Ling and UOB's Mr Tan, are on the lookout for any major strategic policy shifts that may be unveiled in the CFE report. Ms Ling added that should the Singapore economy enter a technical recession, "logical questions that will likely arise are if the property cooling measures and the foreign worker levies will be unwound".

Still, Citi's Kit Wei Zheng believes that a Q4 recession will be avoided - even if risks are "tilted clearly towards the downside". He noted that leading indicators such as the purchasing managers' index (PMI) are mixed. For example, September's manufacturing PMI was the first expansionary reading in over 14 months, although it was not strong compared to regional trends.