BNP Paribas: Singapore only Asian economy to see nominal GDP contraction in Q2

SINGAPORE is the only Asian economy to have seen a nominal contraction in gross domestic product (GDP) in the second quarter of this year, and the foreign exchange-based policy approach of the country's central bank may hurt the real economy than support it, said French bank BNP Paribas.

"Although Singapore's Q2 real GDP growth of 2.2 per cent year on year was respectable, nominal GDP growth is the worst in the region, superficially supporting the case for policy easing.

"However, under the Monetary Authority of Singapore's (MAS) unique foreign exchange-based framework, it risks doing more harm to the real economy than good," wrote BNP Paribas Asean senior economist Philip McNicholas in a note published on Monday.

Mr McNicholas's note comes as Singapore is expected to issue preliminary estimates for its third-quarter economic performance in mid-October. MAS will also announce its monetary approach at about the same time.

At current market prices, Singapore's GDP was at S$99.34 billion in Q2, a fall of 0.9 per cent from a year ago, figures from the Department of Statistics show.

In his note, Mr McNicholas showed that Singapore was the only economy out of 11 Asian ones that clocked a negative nominal GDP growth rate in Q2. India grew the most at just over 10 per cent, while Taiwan was ranked just before Singapore at just under a 2 per cent growth.

Singapore GDP's Q2 nominal fall is not the first time it has happened. In Q1 also, it fell by 0.3 per cent to reach S$99.87 billion.

The situation is different if taken at 2010 prices, however. The GDP had grown by 2.1 per cent year on year, while on a seasonally adjusted scale it was a 0.3 per cent growth.

Downward pressure for businesses here is what's causing the lower nominal GDP, said Mr McNicholas, as firms are pinched by rising domestic labour costs and weak end-demand.

The manufacturing and wholesale & retail trade sectors were the main drags, with their nominal value-added declining in Q2. The former sector accounts for 18 per cent of GDP, the latter takes up 14 per cent. Together, they account for 27 per cent of jobs.

These two sectors, however, are sensitive to different external factors. Manufacturers are largely focused on exports, making them sensitive to changes in the Singapore-dollar exchange rate, while wholesale and retail businesses are more geared into the domestic economy, making them interest rate-sensitive.

"This backdrop poses a conundrum for the MAS," said Mr McNicholas, as re-centring the Singapore dollar's nominal effective exchange rate (S$NEER) may boost export earnings but does little to solve the problem of weak final demand.

Furthermore, with MAS's easing move, domestic borrowing costs may rise as foreign investors hunt for greater yield compensation to offset lost potential forex gains against a backdrop of reliance on wholesale funding by the domestic banking system.

They also have to contend with the looming prospect of the US Federal Reserve raising rates, which may increase debt-servicing burdens for businesses and households. MAS's easing move may thus weaken domestic demand.

In April, MAS had unexpectedly eased policy by flattening the slope of the band it uses to guide the Singapore dollar against an undisclosed basket of currencies of main trading partners.

Mr McNicholas cautioned against another easing move. "As a result, the best course of action for the MAS to achieve policy objectives is to leave settings unchanged. It may not reverse the growth situation, but it should avert a deeper downturn."