Business down, but pessimism easing in Q2: BT-SUSS poll

Singapore

BUSINESS worsened in the second quarter but firms' pessimism recovered slightly from a record low, the latest Business Times-Singapore University of Social Sciences (BT-SUSS) Business Climate Survey found.

The findings of the quarterly survey are in line with economists' views that Q2 marked the trough of the Covid-19 recession, although the recovery ahead will be a slow one.

The survey's analysis, adjusted for over-estimates, predicts that third-quarter year-on-year growth could come in between -5.8 per cent and -7 per cent.

Conducted from June 25 to July 24, with 160 respondents, the survey covers performance in Q2 and business prospects for the second half of the year.

Business performance - measured by the three indicators of sales, profit, and orders or new business - continued to worsen, though at much slower rates than before.

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Net balances sank further into negative territory.

The net balance is the difference between the share of firms with a year-on-year increase in an indicator, and those with a decrease. A positive net balance suggests expansion and a negative one, contraction.

Hitting record lows were the net balances for sales and orders or new business.

The sales net balance was -79 per cent, down 13 percentage points but slowing from the previous quarter's 40 percentage-point fall.

The orders or new business net balance was -82 per cent, down 15 percentage points, slowing from the previous 41 percentage-point fall.

After falling 35 percentage points in the previous quarter, the profit net balance slid a more modest 5 percentage points to -72 per cent in Q2, close to the Q2 1998 record low during the Asian financial crisis.

The survey findings mirror official Q2 figures on Aug 11, with Singapore's gross domestic product (GDP) contracting a historic 13.2 per cent.

Despite the bleak quarter, overall pessimism about the next six months lessened slightly, with the business prospects net balance improving 6 percentage points to -78 per cent.

Yet this was not uniform, with the decreased pessimism due to foreign and large firms. Local firms stayed as glum as before, while small firms became gloomier.

"Small firms have fewer resources and cash buffer to tide them through the longer this pandemic drags and demand remains soft," said OCBC Bank chief economist Selena Ling.

Except for foreign firms, respondents saw business prospects overseas as slightly worse than those at home. This could be due to the improving Covid-19 situation in Singapore "compared with the protracted and evolving situation overseas", said UOB economist Barnabas Gan.

For small firms, their pessimism might be justified by how their overseas performance in Q2 lagged significantly behind their overall performance in terms of sales, as well as orders and new business.

"The pandemic shock has had an uneven impact, hurting SMEs (small and medium enterprises) a lot more than larger firms," said Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye, noting that small firms account for a large proportion of hard-hit sectors such as food and beverage, retail, and recreation.

Business prospects also varied by sector, with the transport and communications sector as least pessimistic.

While the worst is likely over, with Q2 marking a trough, "business expectations surveys point to lingering pessimism for both manufacturing and services sectors", said Ms Ling.

Transport and communications also saw the smallest contraction in sales, for the second straight quarter.

Citing official figures that show an outsized Q2 contraction for transport and storage, and a milder decline for information and communications, Ms Ling said: "It's probably the infocomms side that is holding up better, aided by continued demand for IT and digital solutions."

The financial and business services sector saw the least contraction in profits, while the manufacturing sector saw the least contraction in orders or new business.

The BT-SUSS survey uses regression analysis to predict GDP growth based on lagged net balances. But project consultants Chow Kit Boey and Chan Cheong Chiam noted that their model had large prediction errors during shocks, and that predicted values for this year's Q3 growth are likely to be overestimates.

They thus adjusted the predictions accordingly, predicting that Q3 year-on-year growth could be between -5.8 per cent and -7 per cent.

This is consistent with the Maybank economists' expectation of -6 per cent to -7 per cent growth in Q3.

Ms Ling's Q3 forecast is more pessimistic, at -7.5 per cent. In contrast, Mr Gan expects GDP to contract 4 per cent in Q3 and 2.6 per cent in the fourth quarter, bringing full-year growth to -5 per cent.

In the survey, firms were also asked about their expectations for full-year sales, with an overwhelming majority expecting lower sales in 2020 than in 2019.

The construction sector expects to be worst hit, with a maximum sales change of -97 per cent. Expecting to escape with the least damage is the manufacturing sector, though this still means a minimum sales change of -71 per cent.

Using year-on-year changes in sales to predict GDP growth, adjusted for over-pessimism, the consultants arrived at a predicted range of -8.9 per cent to -3.9 per cent for full-year growth, slightly wider than the official -7 per cent to -5 per cent range.