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Big miss in Q2 GDP darkens technical recession clouds, raises odds of MAS easing: analysts

In the latest whammy to predictions, Singapore’s economy in the second quarter slowed more than expected to near stalling speed based on Friday morning’s flash estimates.

IN the latest whammy to predictions, Singapore’s economy in the second quarter slowed more than expected to near stalling speed based on Friday morning’s flash estimates.

Year-on-year gross domestic product (GDP) growth looks set to ease to a flattish 0.1 per cent in the second quarter of 2019. This is the slowest quarterly growth since the throes of the Great Recession in mid-2009, when the economy shrank by 1.2 per cent. It is also sharply cooler than the 1.1 per cent expansion in the first three months, which was revised downwards by a smidgen from an earlier figure of 1.2 per cent.

Here are economists' quick takes on the GDP estimates:

OCBC Bank - Selena Ling, head of treasury research and strategy: 

  • This brought H1 2019 GDP growth to a paltry 0.6 per cent year on year, which... clearly heightens the risk of a technical recession if growth momentum remains tepid going into Q3. So far, the manufacturing and electronics PMIs (Purchasing Managers' Index) remains mired in contraction territory, while the Singapore PMI has also softened quite rapidly in the past two months.
  • We suspect even if there is a US-China trade agreement materialising in the months ahead, it may not be sufficient to salvage the domestic manufacturing growth for H2 2019.
  • This soft Q2 flash growth data clearly warrants a closer watch on the upcoming October monetary policy meeting where the odds of an easing may have risen.
  • If a technical recession does materialise, we would also not rule out potential targeted stimulus as there is ample fiscal headroom.

UOB - Alvin Liew, senior economist; and Peter Chia, senior FX strategist:

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  • On a SAAR (seasonally adjusted annual rate) basis, the economy contracted 3.4 per cent quarter on quarter in Q2, the deepest quarter-on-quarter contraction since Q3 2012, and clearly puts Singapore at risk of a technical recession if growth falters in Q3 2019.
  • While the year-on-year comparison puts the blame of the weak Q2 growth squarely on manufacturing, the quarter-on-quarter comparison sees the Q2 malaise more widespread as all the main sectors declined sequentially in Q2.
  • We believe that the official 2019 growth range forecast could be revised lower to 0.5-1.5 per cent, from 1.5-2.5 per cent presently.
  • We reiterate our view of a weaker Singapore dollar against the US dollar towards 1.40 by end-2019. Over the immediate one to three weeks, we expect USD/SGD in a range between 1.3520 and 1.3625 with an upside bias.

Maybank Kim Eng - analysts Chua Hak Bin and Lee Ju Ye:

  • We are penciling in a technical recession (no longer shallow), but the risk has shifted towards a deeper recession.
  • The labour market may weaken in the second quarter as retrenchments in manufacturing and trade-related sectors take their toll amid cutbacks on hiring due to rising uncertainties.
  • We expect the Ministry of Trade and Industry to downgrade its GDP forecast to a lower range of 0.5 to 1.5 per cent (from current 1.5 to 2.5 per cent) when the final second-quarter GDP numbers are released in August.
  • Enterprise Singapore will also likely cut its NODX forecast range (currently at -2 to zero per cent), given that NODX has already plunged by 9.3 per cent in the first five months while hopes for a rebound in the second half are fading.
  • The probability of the MAS easing policy at the October meeting will increase if a recession materialises in the third quarter and a US-China trade deal remains elusive.

HSBC Global Research - Joseph Incalcaterra, chief Asean economist:

  • Without doubt, the weakness in Singapore’s GDP print is a harbinger of further growth deterioration across the region. But this isn’t entirely a surprise – for some time now, leading indicators have been telling us that growth is slowing.
  • What surprised us is how broad-based the deterioration was in Singapore, suggesting that unlike other neighbouring economies, domestic-facing sectors are not strong enough to offset external headwinds.
  • While there may be some technical rebound in services in Q3, the overall trend nonetheless points to the need for more policy support. We expect the Monetary Authority of Singapore (MAS) to reduce the slope of the SGD-NEER (Singapore-dollar nominal effective exchange rate) policy band in the October meeting.

ING - Robert Camell, chief economist and head of research, Asia-Pacific; and Prakash Sakpal, economist, Asia:

  • The outlook is not great. Sometimes, when you get a big dip like this, you line up for a subsequent bounce. But this manufacturing dip has strong drivers. Singapore's highly export-driven economy leaves it very exposed to the US-China trade war and the broader slowdown in world trade. Singapore's concentration in the electronics sector during a global tech-slump and technology war also take their toll on the economy. 
  • We don't see any prospect for a substantial improvement in these areas any time soon, though the rate of decline could now be moderating. Nevertheless, the longer the manufacturing sector remains depressed, the more likely this weakness will spill over into services and other sectors. 
  • The dismal economic performance suggests that an inter-meeting adjustment to MAS’s policy, as also signalled by MAS managing director Ravi Menon earlier this month, is imminent. We see the MAS reducing or even flattening the SGD-NEER appreciation path, possibly within the current month.

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