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LOCAL firms in Singapore are increasingly more pessimistic due to falling global demand, depressing a widely-followed business confidence index into a contractionary zone for the first time in three years after it took a turn for the worse in the fourth quarter of 2015.
According to Singapore Commercial Credit Bureau's (SCCB) latest quarterly Business Optimism Index (BOI) study, the index hit a historical low as it fell into negative territory of -2.93 percentage points for Q1 2016, from +0.14 percentage points for Q4 2015.
SCCB surveys 200 respondents in major industry sectors across Singapore every quarter. They are asked about their expectations on six key indicators - sales, profits, employment, new orders, inventories and selling prices - for the following quarter. The index figures represent the net percentage of respondents expecting higher sales, profits, etc, compared to a year ago.
On a year-on-year basis, the latest BOI slid from +1.11 percentage points for Q1 2015 to -2.93 percentage points for Q1 2016.
"We are seeing greater pessimism among local firms due primarily to constrained consumer demand globally as well as prolonged weakness and flat growth seen in sectors such as manufacturing and wholesale for most of 2015," said Audrey Chia, SCCB's chief executive officer.
Ms Chia expects optimism levels to remain muted for the months ahead. Some signs of easing within certain sectors, such as construction, are already evident, and firms have also lowered their expectations for expansion plans moving into next year.
According to SCCB, 90 per cent of the local firms surveyed had anticipated investments for business expansion to remain unchanged. This was up from last year when 81 per cent of local firms expected investments to remain unchanged.
For Q1 2016, only one of six business indicators is in positive territory compared with two of six indicators in Q4 2015. With the exception of selling price, the remaining indicators - volume of sales, net profits, employment, inventory levels and new orders - are contractionary.
The services sector emerged as the most optimistic sector in terms of its Q1 2016 outlook. Firms in the sector remain relatively upbeat on the back of increased tourist arrivals in recent months. New orders are expected to be relatively upbeat.
SCCB said the improved sentiments are largely due to the continued resilience within the corporate services and information and communications sub-sectors.
The transportation sector was the second most optimistic sector, given the upturn in the air and land transport segments. It is also the most optimistic about new orders, registering +29.41 percentage points in Q1 2016.
In contrast, confidence within the construction sector has taken a turn for the worse after emerging as one of the least optimistic sectors for Q4 2015. The weaker showing was largely attributed to muted public building activities. New orders within the construction sector are expected to be contractionary for Q1 2016 at -8.33 percentage points.
As with the previous quarter, Singapore's manufacturing sector emerged as the least optimistic sectors with all six business indicators in the contractionary region. This was largely due to a sustained decline in manufacturing output, most notably in the transport engineering, electronics and precision engineering segments. New orders fell to a historical low, from -22.22 percentage points for Q4 2015 to -56.0 percentage points for Q1 2016.
Firms appear more willing to invest in skills upgrading of employees. They also expect investments in machinery and capital equipment, research and development and IT infrastructure to be cut. Investments in mergers and acquisition activities are expected to increase to 7 per cent in 2016, from 2 per cent in 2015.
More than half of the firms, compared to 22 per cent in 2015, see the global economic uncertainties as the main challenge next year. Other challenges include rising business costs, reduced sales, foreign labour issues and the lack of financing.
In terms of employment, levels are expected to fall into the contractionary zone at net -4.93 per cent, compared to net +15.0 per cent in Q4 2015. The financial sector is the only sector which is most optimistic about employment, while sentiment in the services, manufacturing, construction and mining is less sanguine, falling into the contractionary zones.