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Firms adapting to trade wars, but there's more pain ahead

Survey finds continued decline of some performance indicators into negative territory confirms start of a contraction phase in business cycle

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While business performance continued to worsen in the first quarter of 2019, firms are no more pessimistic over business prospects in the next six months than they were a quarter ago.

Singapore

WHILE business performance continued to worsen in the first quarter of 2019, firms are no more pessimistic over business prospects in the next six months than they were a quarter ago.

This is according to the latest Business Times-Singapore University of Social Sciences (BT-SUSS) Business Climate Survey, which was led by consultants Chow Kit Boey and Chan Cheong Chiam and polled 144 firms between March 20 and April 17.

Pessimism over business prospects overseas rose while pessimism over Singapore business prospects decreased, keeping overall net balance in sentiment unchanged.

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This was slightly better than the findings of the government's latest business expectations surveys, which found that expected business conditions had worsened for April-September 2019.

CIMB economist Song Seng Wun believes the unchanged pessimism over business prospects reflects the stagnant trade war situation during the quarter.

"During the period when this survey was conducted, there was no escalation in the trade war, (which is why) we see in some industries signs of sentiment bottoming out or hovering," Mr Song said. "Not optimistic, but sort of resigned to the situation. The next survey could show a dip."

On the other hand, Ms Chow does not expect the noisier trade environment to heighten pessimism in the next quarter, since firms have been riding the trade war rollercoaster for a while now.

"I think this is a very turbulent time, but the businesses have tried to live with it and have adapted to such uncertainty," she told BT.

However, the project consultants also noted that the continued decline of the other three performance indicators into negative territory in Q4 2018 and Q1 2019 confirm the beginning of a contraction phase in the business cycle.

For the first quarter, sales net balance contracted to negative 21 per cent, and the net balance of profits fell further to negative 33 per cent. The net balance is the difference between the percentage of firms reporting an increase in the indicator and those reporting a decrease. A positive net balance suggests expansion and a negative net balance, contraction.

For new orders, the net balance dipped nine points to -25 per cent.

UOB economist Barnabas Gan expects performance to continue suffering if negative external conditions do not let up.

"The ongoing US-China trade tensions, the maturing of the global electronics cycle and the economic slowdown of China are key risk factors to the Singapore economy as we are a small and price-taking market player," said Mr Gan. "As such, a brighter outlook on Singapore's economy is dependent on a positive upturn in the factors above."

He expects slower economic growth in key trading partners like China to weigh on Singapore's economy and local firms' expansion plans. These could be offset by better financing like the Market Readiness Assistance grant for overseas expansions, as well as benefits in the Belt and Road Initiative including opportunities to collaborate with Chinese counterparts on infrastructure and logistics developments.

On a sector level, the transport and telecommunications emerged as the star performer in sales, profits and new orders for Q1 2019. Construction firms were the least pessimistic among the sectors.

However, none of the sectors registered expansion in any of the three performance indicators, nor in optimism over business prospects in the next six months.

Regression analysis of the survey results predicts gross domestic product (GDP) growth to come in at between 1.2 and 1.6 per cent for Q2, roughly similar to advance Q1 estimates of 1.3 per cent. This growth slowdown is mainly due to frequent external disruptions and a high base a year ago, the consultants said.

Mr Song and Mr Gan concurred with the findings.

"Q1 revised data might see a slight upward revision because of the less bad manufacturing performance in the quarter, but (Q2 growth) should be similar," said Mr Song. "Hopefully, it comes in at the higher end with a lift from construction and modern services."

UOB's Mr Gan expects second quarter growth of 1.3 per cent.

The Monetary Authority of Singapore has suggested that domestic demand could help mitigate external pressures on the economy, but Mr Song sees Singapore's tiny domestic market as capable of providing only a minimal boost.

Mr Gan, however, notes that bright spots remain, such as the adoption of digital payments technology, which supported growth in the finance and insurance sector in Q4 2018.

"Even as growth in trade-related clusters will likely taper as external environment headwinds persist, pockets within the financial, business and Information and Communications Technology services sectors will continue to benefit from steady domestic demand amid increased investments in digitalisation," he said.

The survey also asked firms to cite the country or economy whose economic performance will have the greatest impact on company sales in 2019. Singapore and China remained first and second-most cited as in 2018, while Indonesia reclaimed third place after being displaced by Malaysia last year.

Firms with overseas sales ranked China as the economy with the greatest impact, followed by Indonesia and Singapore.

In the next quarter, the survey will ask companies how much they expect their sales to grow in 2019, compared to 2018, said Ms Chow. Firms gave an estimate of 3.3 per cent last year, which was close to actual GDP growth for the full year.

"Companies are becoming quite realistic about the growth rate," she said. "Previously, they were more pessimistic, so we had to look at past patterns and make some adjustments, but last year we did not have to. So I think the next quarter's survey results will be exciting."