Some economists brace for technical recession this year even as MTI says it is not expecting one

SINGAPORE should not rule out the possibility of a technical recession this year, some economists said, even though the Ministry of Trade and Industry (MTI) on Thursday (May 25) stated this is not its baseline scenario.

“We are less optimistic than MTI and see the economy stagnating rather than rebounding in the coming quarters,” Maybank economists Chua Hak Bin and Lee Ju Ye said.

Singapore may slip into a technical recession, defined as two consecutive quarters of sequential contraction, if the boost from China’s reopening fails to materialise in the second quarter, said the Maybank team, adding: “The return of China tourists has been more a trickle than a flood.”

Their comments came shortly after fresh data from MTI showed that Singapore’s gross domestic product (GDP) expanded 0.4 per cent year on year, a notch higher than an advance estimate of 0.1 per cent.

It was marginally better than the 0.2 per cent growth that private-sector economists polled by Bloomberg were expecting, but not so when compared to the previous quarter’s 2.1 per cent expansion.

On a seasonally adjusted quarterly basis, GDP contracted 0.4 per cent, better than the advance estimate of a 0.7 per cent contraction. In Q4, the economy grew 0.1 per cent.

During a media briefing on Thursday morning, MTI chief economist Yong Yik Wei said the ministry is not expecting a technical recession this year, despite earlier fears.

“Given the downside risks and the weakening outlook, we cannot rule out the possibility that there could be some negative quarter-on-quarter growth this year – but that’s not our baseline,” said Yong.

Instead, quarterly growth, expected to be “fairly flattish” in the first half of the year, should pick up gradually in H2, she said.

She added that a technical recession, if any, would be led by the manufacturing sector, while the consumer-facing sectors and aviation continue to be resilient.

Indeed, the manufacturing sector registered a deeper contraction in Q1 at 5.6 per cent, worsening from the previous quarter’s 2.6 per cent decline. Growth in the construction sector eased to 7.2 per cent year on year, from 10 per cent in Q4.

It is for this reason that UOB senior economist Alvin Liew believes there is “still substantial risk” Singapore may enter into a technical recession in H1.

“The export outlook remains dire, and we expect more pronounced year-on-year contractions for a few more months of NODX (non-oil domestic exports) before improving in the later part of H2 2023,” he said. Separately, Enterprise Singapore significantly downgraded its full-year export outlook following a weaker-than-expected showing in Q1.

UOB’s full-year GDP outlook remains at 0.7 per cent growth, whereas Maybank’s is 0.8 per cent.

MTI’s forecast range is at “0.5 per cent to 2.5 per cent, with growth likely to come in at around the midpoint of the range”.

At the morning briefing, MTI permanent secretary Gabriel Lim told reporters that the ministry’s assessment is that Singapore’s external demand outlook for the rest of the year has weakened.

“We’ve taken that into account in our updated projections – which is why this time around, we’ve given additional guidance that full-year growth is likely to come in at the midpoint of the range,” he said.

This is because growth in the United States and eurozone is expected to “decelerate more significantly” in H2 due to the lagged effects of monetary policy tightening. China’s recovery is likely to be stronger than expected, driven by a pickup in domestic services consumption, even as its industrial sector remains sluggish.

“Apart from the expected slowdown in the advanced economies, the electronics down cycle is likely to be deeper and more prolonged than earlier projected,” he said, adding that spillovers from China’s recovery are also expected to remain weak since services activities are less “import-intensive”.

Meanwhile, Patrick Tay, assistant secretary-general of the National Trades Union Congress, said there is a need to “pay close watch to labour market figures as well”.

“The cyclical effects from the various global challenges and headwinds will soften the labour market despite our tight labour market,” he said. “The first-half layoff numbers are not looking good, and concerns are that it may permeate into the second half of the year.”

Green shoots?

However, not all economists are downbeat about Singapore’s prospects, given the positive outlook for the services sector as well as the aviation and tourism-related sectors.

“Despite seeing a marginal contraction in its GDP growth, on a sequential basis, it does not mean a recession is on the cards this year,” said HSBC economist Yun Liu, maintaining her full-year outlook at 2.1 per cent. “No doubt, growth will be sharply slower, but there remain green shoots in the economy to weather the challenges.”

Growth in the overall services industries moderated to 2 per cent year on year in Q1 from 4 per cent in the previous quarter. Accommodation was the best performer, growing 21.9 per cent year on year, up from Q4’s 7.8 per cent.

“Services should pick up speed from Q2 onwards, given the strong rebound in international visitors,” said OCBC chief economist Selena Ling, who is keeping her forecast at 1.5 per cent. “H2 is likely to herald a modest manufacturing recovery compared to the same period last year, even though the full-year is still likely to see a year-on-year contraction.”

Concurring, DBS economist Chua Han Teng is expecting a turnaround in H2 with an outlook of 2.2 per cent. “Forward-looking indicators such as the recent business expectations survey showed a turnaround in manufacturers’ sentiment over the next six months to positive zone after three quarters of gloom, while that for the overall services sector is positive and stable,” he said.

In addition to the higher tourism levels and improving high-frequency data, RHB senior economist Barnabas Gan said: “Risk appetite may continue to recover on the back of near-peak rates seen in developed markets, with markets likely pricing in some rate cuts into 2024.”