Persisting woes in Europe likely to hit S’pore’s growth

Singapore — Economic woes in the eurozone are likely to persist for a long period and may send Singapore, which is experiencing uneven growth, into a deeper slowdown, as demand for the Republic’s exports and services weakens further.

Economists whom TODAY spoke to voiced these concerns a week after the International Monetary Fund (IMF) cut its full-year growth forecast for the region from 1.2 per cent projected in April to 0.8 per cent, coupled with a near 40 per cent chance of slipping back into a recession and a 30 per cent chance of deflation.

With Europe’s recovery appearing to lose steam, the Ministry of Trade and Industry (MTI) now estimates a 2.4 per cent growth for the third quarter, lower than the 2.8 per cent consensus forecast, and full-year growth may dip below 3 per cent if Europe’s troubles worsen, said economists.

“Headline inflation in the eurozone has been declining since November 2011, inching towards deflation. When that happens, consumers and corporates will hold their purchases and that will constrict consumption demand,” UOB’s Mr Francis Tan told TODAY. “If that downward spiral doesn’t stop, there’s a good chance that Singapore’s full-year GDP will hit sub-3 per cent levels for this year and 2015.”

Singapore counts the eurozone as its biggest export market, with volume reaching €17.8 billion (S$29 billion) last year. Weak European sentiment will affect shipments — a trend that has been visible since the onset of the sovereign debt crisis in 2009.

Data compiled by International Enterprise Singapore showed growth in non-oil domestic exports to the eurozone fell from 30.7 per cent year-on-year in 2010 to only 0.2 per cent in 2011. In 2012, it saw a 3.8 per cent on-year decline, which widened to 25.5 per cent last year. The fall persisted as the first quarter of the year recorded a 7.6 per cent on-year drop, while the second quarter saw a 13.1 per cent contraction.

“I expect this decline to continue for our major export categories, including electronics and pharmaceuticals. It may, in fact, take a full decade before Singapore’s exports to the eurozone see meaningful recovery,” said CIMB’s Mr Song Seng Wun.

“Europe’s unemployment rate remains sticky and the IMF expects it to stay above 11 per cent into next year — that means no lift for consumption. The Ebola outbreak may derail its recovery ... and that makes the eurozone a problem for Singapore’s growth.”

The Republic’s services cluster may also take a hit. The Monetary Authority of Singapore’s managing director Ravi Menon said in July that the banking sector here might suffer a retraction of trade-finance activities from Europe. Financial services made up 19 per cent of the €13.58 billion in services Singapore exported to the eurozone in 2012, European Commission data showed.

But Bank of Singapore chief economist Richard Jerram believes Singapore’s banking system will not be hurt by the fallout of the European crisis. “Singapore’s vulnerability through banking system channels is very low. The impact of European banks’ weakness has not been as strong as expected since the financial crisis and I don’t think marginal changes in European growth rates will affect Singapore’s financial systems as much as its exports.”

Nonetheless, against the backdrop of the eurozone’s economic turmoil, Singapore may need to seek growth support elsewhere, he noted. “Europe has deep structural problems and ... may be a poor source of export growth for many years. I think Singapore should focus more on other markets.”

Agreeing, Mr Tan added that Singapore’s growth driver is in Asia. “In 2000, ASEAN exported about 33 per cent of its goods to Asia. That number is set to reach 61 per cent by 2020.”