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DBS downgrades full-year Singapore growth forecast to 0.7%, OCBC lowers it to 0-1%

IN the wake of disappointing second-quarter flash data, economists have trimmed their full-year growth predictions for Singapore in 2019.

DBS Group Research on Monday downgraded its full-year gross domestic product (GDP) growth forecast to 0.7 per cent, in light of the latest set of “exceptionally poor” data, economist Irvin Seah said.

Meanwhile, Selena Ling, head of treasury research and strategy at OCBC Bank, said a zero to one per cent year-on-year range for full-year growth “may be more realistic at this juncture”.

“The topside of our (previous) forecast of 0.5-1.5 per cent year on year looks increasingly less likely,” she added.

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Ms Ling also said that a potential downward revision of the official GDP growth forecast for 2019 from 1.5-2.5 per cent would not come as a surprise, “but the question is the extent of the downgrade”.

Mr Seah from DBS noted that the official forecast is likely to be lowered to 0.5-1.5 per cent this year in August when the final Q2 figures are released.

On Friday, advance estimates for Singapore’s second-quarter GDP showed a much deeper slowdown than was feared, with growth projected to scrape in at just 0.1 per cent year on year, the weakest in 10 years since the global financial crisis.

Besides the risk of a technical recession – two consecutive quarters of negative GDP growth – the key concern is that overall GDP growth for the year could turn out significantly lower, Mr Seah said.

He noted that the manufacturing sector is already in a technical recession, with three consecutive quarters of sequential declines.

With Singapore’s manufacturing PMI (purchasing managers index) dipping into contraction territory, outlook for the sector appears bleak, Mr Seah said.

“Another quarter of disappointment, which is likely judging from the hostile external environment and weak global demand, would push the manufacturing sector into an outright recession (ie a full-year contraction),” he added.

But the sub-par performance in manufacturing was not a surprise amid the external headwinds.

“The biggest let-down came from the service and construction sectors, as the expectation was for both to hold up and to cushion the slide in manufacturing,” Mr Seah said.

The construction sector saw a deep sequential decline of 7.6 per cent quarter on quarter on a seasonally adjusted basis, while the service sector – traditionally a stable engine of growth for Singapore – dipped by 1.5 per cent quarter on quarter on a seasonally adjusted basis.

The service sector accounts for about two-thirds of GDP and employment. “Further weakness in the services sector would not only weigh down on growth but also hit the labour market squarely,” said Mr Seah.

Likewise, OCBC’s Ms Ling said that given the importance of the service sector as a jobs engine, it could start to impact hiring intentions if sentiments remain lacklustre into the second half of this year, although the new dependency ratio ceiling (DRC) measures from January 2020 may mitigate any fallout on this front.

The latest GDP figures have made the debate on whether Singapore will dip into a technical recession “entirely meaningless”, said Mr Seah.

“Full-year GDP growth will still fall sharply below expectation and below the official forecast range of 1.5-2.5 per cent, even with a positive sequential growth (ie Singapore averts a technical recession) and even if the Q2 GDP figures are revised up marginally,” Mr Seah said.

Even with an improvement in Q3, it will not be strong enough to offset the decline in Q2, judging from the fragile economic conditions, he added.

In a statement on Friday, Deputy Prime Minister Heng Swee Keat said the government does not expect a full-year recession at this point.

Near-term growth outlook will also continue to be clouded by risks in the external environment, such as the US-China trade tensions, the risk of a trade spat between the US and eurozone, and the Middle East tension on Iran, Mr Seah said.

DBS also lowered its growth projection for next year. It now expects GDP growth to average 1.8 per cent in 2020, down from its previous forecast of 2.5 per cent.

“With the economic climate likely to remain challenging in the coming quarters, such sluggish growth momentum is expected to persist in the coming quarters,” Mr Seah said.