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GDP growth to stay subdued, expansionary fiscal policy likely in next Budget: analysts

SINGAPORE may have skirted a technical recession - defined as two consecutive quarters of contraction - in Q3, according to flash estimates from the Ministry of Trade and Industry (MTI) on Monday morning. Gross domestic product (GDP) looks to have grown by just 0.1 per cent year on year (y-o-y) in July to September, flat on the meagre expansion of 0.1 per cent posted in Q2.

This also came as the Monetary Authority of Singapore (MAS) eased monetary policy "slightly" in its half-yearly review on Monday, slightly reducing the Singapore dollar’s pace of appreciation.

Here are analysts' quick takes on the Q3 GDP estimates:

OCBC Bank - head of treasury research and strategy Selena Ling 

"The main drag was again manufacturing, as expected, at -3.5 per cent y-o-y. However, the more disconcerting fact is that the services sector has continued to soften in growth momentum to 0.9 per cent y-o-y, the slowest pace since Q3 2009. To a certain extent, belt-tightening by consumers domestically is inevitable given the ongoing downgrades of global and domestic growth expectations.

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"We anticipate another anaemic Q4 GDP growth, with the risk that full-year 2019 growth may come in at the lower end of the official zero to 1 per cent y-o-y forecast. Without a complete unwinding of existing US-China tariffs, the cloud over the global trade environment will not fully dissipate. Accordingly, the electronics and supporting industries should still see persistent weakness over the near term.

"In 2020, we expect a modest improvement in Singapore’s GDP growth to 1-2 per cent y-o-y, but this is from a low base in 2019 and predicated on no further escalation in US-China trade tensions and geopolitical hotspots. MAS’s current monetary policy easing is a calibrated move, given that currently there is no technical recession or full-year recession. That said, the window remains open for another measured easing come April 2020 should Singapore’s output remain below potential.

"Labour market softening is to be anticipated and could be the catalyst for a more expansionary fiscal policy stance at the upcoming FY2020 Budget. While the headline unemployment rate has edged up slightly, the retrenchment data is not alarming at this juncture. The FY2020 Budget may see more targeted measures to assist workers, especially those facing transition difficulties, through reskilling and upskilling."

HSBC - Asean chief economist Joseph Incalcaterra, senior Asia FX strategist Joey Chew and economist Yun Liu

"MAS expects full-year GDP growth to come in around the midpoint of the zero to 1 per cent forecast range in 2019, before improving in 2020. Likewise, HSBC forecasts full-year GDP growth for 2019 to slow to 0.4 per cent y-o-y from 3.1 per cent last year, and for 2020 to post a 0.9 per cent growth.

"MAS’s decision to 'slightly' reduce the slope of the currency band, as opposed to moving to a 'neutral' or zero per cent slope, has to do with the central bank's confidence in the resilience in the domestic economy. While MAS sounds increasingly concerned about the direction of the global economy, it nonetheless sees current signs of resilience in Singapore's domestic growth. In particular, growth in education, health, and social services should hold up, and the construction sector is expected to recover in the year ahead due to a robust pipeline of public infrastructure projects.

"Notwithstanding the confidence in the current state of the domestic economy, we believe the overall forward-looking outlook is still subdued, and as a result, the monetary policy statement is dovish. We believe the MAS has just embarked on what is likely to be a sequence of policy easing steps.

"Based on HSBC forecasts for growth in China to ease to 5.8 per cent next year, and US growth to decelerate to 1.7 per cent, global growth is set to slow further. In fact, we see a risk that the Singapore economy may enter a technical recession between Q4 2019 and Q1 2020. As a result, we forecast the MAS to adopt a flat slope in H1 2020, likely in April. Any further moves (such as band recentrings) would be contingent on the extent of global growth weakness next year.

"MAS stated it 'will continue to closely monitor economic developments and is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly'. We note that MAS has seldom said that it will be closely monitoring economic developments - the last time it did so was in October 2016. Moreover, what is even rarer is for it to add an extra phrase behind as well - the last time it did so was in January 2015, when it added: 'and stands ready to curb sharp movements in the S$NEER (Singdollar nominal effective exchange rate)'."

DBS Group Research - economist Irvin Seah

"In response to the latest figures, we are lowering our full-year 2019 GDP growth forecast to 0.6 per cent, down 0.1 percentage point from the previous estimate, despite a likely marginal upward revision to the latest set of figures and some improvement in growth performance in Q4.

"On the surface, the manufacturing sector appears to be in doldrums; headline growth posted a contraction of 3.5 per cent y-o-y. However, that is partly a result of the high base in the same period last year. Sequentially, the sector recovered to register a marginal decline of 0.4 q-o-q (quarter on quarter) on a seasonally adjusted annual rate (saar) basis, a marked improvement from the drop of 4.2 per cent previously. This is in line with our view that the manufacturing sector could be bottoming out. We reckon that the worst of the manufacturing growth cycle could be over, but caution that growth in this sector will remain lacklustre amid weak global demand and uncertainties around the ongoing US-China trade talks.

"Indeed, there have been mixed signals on services growth. Business loan growth appears to have bottomed, but consumer loan growth continues to slide. The main worry is the spillover effects on the labour market. Beyond the present monetary easing by the MAS, expect a robust fiscal response in the upcoming Budget. An outsized accumulated surplus of about S$15.6 billion implies ample room for aggressive fiscal support for the economy. We expect Singapore authorities to roll out a highly expansionary fiscal policy early next year. Though the economy has averted the fate of a technical recession, a robust policy response would still be required to lift the boat amid the choppy outlook.

"Growth may have bottomed, but the improvement ahead could be weak. We expect GDP growth in 2020 to improve to 1.4 per cent y-o-y, up from the revised 0.6 per cent growth for this year."

Citi - economists Kit Wei Zheng and Ang Kai Wei, and rates strategist Gaurav Garg

"MAS now sees a small negative output gap, which is expected to persist in 2020 despite a projected 'modest' pickup in growth. Citi anticipates full-year 2019 GDP growth at 0.6 per cent, assuming Q4 growth rebounds to 2-3 per cent q-o-q saar and averages 1.5-2.5 per cent in 2020, with full-year 2020 growth at 1.7 per cent.

"Core inflation for 2019 is now expected to come in within the lower end of the 1-2 per cent official forecast range. For 2020, we see it likely in the upper half of MAS’s 0.5-1.5 per cent forecast.

"For rates, even as the expectations of further dovish MAS action persists, shifts in the Singapore dollar’s liquidity may continue to dominate the near-term relative performance of Singapore rates. Over the medium term, we expect the economic fundamentals to dominate driving narrowing of spread between US and Singapore rates."

Bank of Singapore - currency strategist Sim Moh Siong

"MAS’s S$NEER slope reduction seems like a strong message by the authorities that they are confident of the economy weathering this trying period, given the view that domestic GDP will pick up 'modestly' in 2020.

"Singapore's economy continues to face headwinds from slowing trade, which has weighed heavily on the manufacturing sector in recent months, although there are specific pockets of economic strength from finance, insurance and education. Given the broadening global drag and the slide in business sentiment, sub-par growth is likely to persist.

"Risks are skewed towards further easing in April 2020, although whether MAS further eases may now be a closer call, as a possible Brexit breakthrough and a US-China temporary trade truce could temper Singapore’s downside growth risks. If the pause in US-China trade tensions proves to be durable, this, plus the global monetary easing that is underway, could help drive a weak global recovery from early 2020.

"Inflation is likely to remain benign, with MAS expecting core inflation to come in at the lower end of its 1-2 per cent forecast range in 2019. It also forecasts 2020 core inflation to average 0.5-1.5 per cent. We expect subdued inflationary conditions to persist given limited pricing power and soft wage pressures."

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