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Analysts downbeat ahead of Q3 GDP results, expect technical recession

SINGAPORE — With all eyes on Singapore’s third-quarter economic report card due tomorrow, analysts are forecasting the economy to have fallen into a technical recession for the first time since the global financial crisis in 2008, raising expectations that the central bank will ease policy as the haze casts a grey pall over the outlook for the rest of the year.

Analysts downbeat ahead of Q3 GDP results, expect technical recession

On a quarter-on-quarter seasonally-adjusted annualised basis, the Singapore economy shrank by 4 per cent in the second quarter, a reversal from the 4.1 per cent growth in the first quarter of this year. Photo: Ooi Boon Keong

SINGAPORE — With all eyes on Singapore’s third-quarter economic report card due tomorrow, analysts are forecasting the economy to have fallen into a technical recession for the first time since the global financial crisis in 2008, raising expectations that the central bank will ease policy as the haze casts a grey pall over the outlook for the rest of the year.

“For the third quarter, we will see a mild technical recession, with an expected 0.4 per cent quarter-on-quarter seasonally adjusted annual rate decline, led by the drag in manufacturing. Things are still bad and we are not out of it yet. However, the services sector might be the wild card which can surprise us on an upside and turn the situation around,” said UOB economist Francis Tan.

On a quarter-on-quarter seasonally-adjusted annualised basis, the Singapore economy shrank by 4 per cent in the second quarter, a reversal from the 4.1 per cent growth in the first quarter of this year.

A technical recession is defined by two consecutive quarter-on-quarter contractions in gross domestic product, while a full-blown recession is defined by the economy suffering a full year-on-year contraction that is often accompanied by an increase in unemployment and a drop in real wages.

The manufacturing sector, which accounts for about one-fifth of the Singapore economy, is the main drag on the economy. Hurt by falling exports amid a weak external environment, the sector had contracted by 4.9 per cent year-on-year in the April-to-June period, extending from a 2.4 per cent decline in the previous quarter. Meanwhile for the three months through June, services producing industries expanded by 3.4 per cent, slowing from the 4.2 per cent growth in the previous quarter.

DBS economist Irvin Seah warned that the services sector, which accounts for about two thirds of the economy, is unlikely to be able to save the economy from falling into recession in the third quarter.

“On a sequential basis, output fell by 1.1 per cent quarter-on-quarter in the second quarter. Being relatively more labour intensive, a domestic manpower crunch has weighed down the sector. In addition, externally oriented services clusters have been affected by the weak global environment.”

With the United States on track to raise its key interest rate, China’s economy continuing to slow and the haze clouding prospects, the Monetary Authority of Singapore (MAS) may be pushed to ease the Singapore dollar settings at its meeting tomorrow, analysts said.

“We view that there will be a monetary policy revision, and are still convinced that the MAS may execute a one-off downward shift in the S$NEER (Singapore dollar nominal effective exchange rate) mid-point by 1 per cent,” said Mr Tan.

“With a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain. Challenges are compounded by potential capital flight that could result from higher US interest rates and/or fears of further yuan devaluation. We expect the MAS to re-centre the S$NEER policy band lower by half a band, which by our model would be equivalent to a one-off devaluation of 2 per cent,” said Mr Seah.

OCBC’s head of treasury research and strategy Selena Ling, however, expects no change from the MAS tomorrow. “Growth-inflation dynamics are generally undershooting the trend, but not at an uncomfortable level yet, and policymakers may choose to save their ammunition for a rainy day,” she said.

The haze, which choked Singapore throughout last month and so far this month, may cost the economy hundreds of millions of dollars this year, analysts said. The haze in 1997, the worst thus far, cost the Singapore economy about US$300 million (S$419 million), while a milder event in 2013 led to about US$50 million in losses, mainly to retailers, hotels and the broader tourism industry, analysts estimated.

“The haze probably had the greatest impact on the hospitality and food and beverage sector given that Singaporeans also shunned outdoor activities. The economic impact of haze this time round really depends on the severity and sustained duration — if it really lasts till end-November. A guesstimate would be in the tens to hundreds of millions of dollars,” said Ms Ling.

The Singapore Retailers Association said brick-and-mortar merchants have seen shopper traffic down by up to one quarter in some areas due to bad weather, but online traders selling consumer goods such as groceries have seen a marginal increase in sales.

The Singapore Tourism Board (STB) said the haze has hurt visitorship at tourist attractions and events, in particular those with an outdoor component. “(We are) monitoring the situation closely and working with tourism industry partners to assess the overall impact,” said Mr Oliver Chong, executive director of communications at STB.

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