Technical recession or not, underlying factors matter more

SINGAPORE'S narrow escape from recession in the third quarter may be good news for consumer sentiment, but it is arguably more productive to focus on specific aspects of the economy, rather than the narrow binary of whether a technical recession is upon us - which, at any rate, could be overturned by updated figures.

Flash figures on Monday put third quarter year-on-year growth virtually flat at 0.1 per cent, the same as the previous quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, growth was 0.6 per cent, a turnaround from the second quarter's 2.7 per cent contraction.

Singapore thus dodged a technical recession, defined as two consecutive quarter-on-quarter falls. Though of course better than the alternative, this close escape is arguably not good enough. Third-quarter figures actually underperformed economists' consensus forecasts of 0.2 per cent year-on-year growth and 1.2 per cent quarter-on-quarter growth.

Placing an overly-strong emphasis on the question of whether Singapore has slipped into a technical recession - whether this quarter, or in the future - risks distracting from the underlying dynamics of the economy.

Beyond the relief-prompting headline of an averted technical recession, there are specific reasons to worry.

This quarter's narrow escape, after all, took place despite continued weakness in the manufacturing sector. Ongoing trade tensions between the United States and China suggest that it might be too early to see a bottoming-out.

More worryingly, growth momentum in services - the sector meant to buoy this year's performance - continued to soften. Q3 services growth was 0.9 per cent year on year, the slowest pace in a decade.

Another important area to watch is the labour market. The Monetary Authority of Singapore's (MAS) half-yearly policy statement on Monday noted that labour market conditions "are softening as firms become more cautious about hiring", with this expected to "lower" wage growth in 2019 and 2020, compared to 2018.

This is in contrast to its April assessment that labour market conditions were "firm" and wage growth would "taper only slightly" down.

In any case, final third-quarter figures might tell a different story when they are released in November.

Granted, there is the chance they could surprise on the upside. The Q2 quarter-on-quarter figure was itself revised upwards on Monday: a 2.7 per cent fall, from an earlier 3.3 per cent contraction.

Yet the possibility cannot be ruled out that the final Q3 figure will instead come in lower. The Purchasing Managers' Index, a leading indicator of manufacturing activity, worsened unexpectedly in September after two months of slight improvement, suggesting a late-quarter souring of prospects.

Given the narrow escape in Monday's figures, a significant downward revision could flip the story into one of slipping marginally into technical recession instead.

Rather than worrying about if and when that might happen, perhaps it might do to keep an eye on warning signs while taking comfort from official reassurances. The government has said repeatedly that it is ready to intervene with stimulus measures when needed, and on Monday, the MAS took the uncharacteristic move of stating explicitly that it "is prepared to recalibrate monetary policy should prospects for inflation and growth weaken significantly".