Singapore SMEs in expansionary mode after five straight quarters of contraction: OCBC

SINGAPORE’S small and medium-sized enterprises (SMEs) saw a turnaround in the second quarter, entering expansionary territory after five straight quarters of contraction, according to OCBC’s quarterly SME Index released on Thursday (Jul 11).

This was led by export-oriented industries, which accounted for three out of the four industries that went from contraction to expansion.

“The turnaround story was really more in the external sector,” Linus Goh, head of global commercial banking at OCBC, told The Business Times.

The index, which measures SME health and performance, rose to 50.2 in Q2, up from 49.7 in Q1.

A reading above 50 indicates improved activity compared to a year earlier, while one below 50 indicates deterioration.

The index is derived from the transactional data of more than 100,000 SME customers – each with annual revenue of up to S$30 million – of OCBC in Singapore.

In Q2, SME collections from customers grew 1.4 per cent year on year, while operating costs dipped by 1.3 per cent.

Of the 11 industries represented in the index, seven were in expansionary territory in Q2, up from three in Q1.

In particular, three export-oriented sectors – resources; transport and logistics; and wholesale trade – marked turnarounds after six consecutive quarters of contraction, noted Goh.

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The fourth to see a turnaround was the domestic-facing healthcare sector, which rose to 50.2 in Q2, from 49.4 in Q1.

Three domestic-oriented industries remained in expansion: retail (50.3), food and beverage (50.6), and education (50.8).

“Quite a number of key industries within the domestic sector were positive, and that has buoyed the growth in the Singapore economy for the better part of the last 18 months or so,” Goh said.

Still recovering

The major export-oriented sector of manufacturing remained in negative territory, but showed “positive movement”, particularly in electronics and semiconductors, and precision engineering, Goh noted.

Overall, the manufacturing sector posted a reading of 49.9 in Q2, up from 49.8 in the preceding quarter but just shy of tipping over into expansion.

However, two sub-sectors were positive: electronics and semiconductors at 51.3, and precision engineering at 50.7.

Most other industries in contractionary mode also improved sequentially.

The business services sector registered a reading of 49.8, up from 49.4 in Q1, while the ICT industry rose to 49.5, from 48.5.

The only sector with a fall was building and construction, which dipped marginally to 49.8 from 49.9 before. “The good news is that there is consistency in that number,” said Goh, referring to the sector’s readings in past quarters.

Looking ahead

Despite the improved performance figures, SMEs seemed more pessimistic about the business outlook in Q2’s survey.

Out of 800 SME bosses polled, 47 per cent expect their business to perform better over the next six months, down from 51 per cent in Q1.

However, Q1’s optimism could have been “an outlier”, Goh suggested: “Actually, if you go back over the whole of last year, the reading was quite consistent at around 47 per cent.”

Another 40 per cent expect business to remain the same, with the remaining 13 per cent bracing for a weaker near-term outlook.

As for the SME Index itself, OCBC expects prints for the rest of the year to remain relatively flat.

“The themes are all big on geopolitical uncertainties,” said Goh. “Those are frustrating, because those are things that are quite outside of (SME bosses’) hands.”

Such uncertainty is fuelled, for instance, by changes in government – and therefore in policy – resulting from elections in recent months, including in Indonesia, India, the United Kingdom and France, as well as the upcoming US presidential election in November.

As for how these events affect Singapore’s SMEs, Goh said businesses involved in overseas value chains will have to watch how things play out.

“Power is changing hands (and) policy is likely to be reshaped,” he added. “It’s still early to see how it will play out, but one would expect some potential disruption, both to demand as well as to supply chains.”

Ongoing trade tensions between Western countries and China have also been exacerbated by recent electric vehicle (EV) tariff hikes.

Higher duties on Chinese EV imports came into effect in the European Union earlier in July, while the US has announced a quadrupling in tariffs on Chinese EVs that is set to kick in later this year.

“The fact of the matter is the Singapore firms – and many of them do have a part to play in those value chains – (that) anytime there’s a disruption, either to demand or to supply chain, they will have to reshuffle,” said Goh.