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Economists less hopeful of a recovery for S'pore in the second half of the year

SINGAPORE — Private sector economists say initial hopes for the Singapore economy to recover in the second half of this year have dimmed now that global technology firms have been swept up in the trade dispute between the United States and China.

Singapore’s economy grew its slowest rate in 10 years, weighed down by the manufacturing sector. And that could potentially worsen with the latest US ban on Huawei.

Singapore’s economy grew its slowest rate in 10 years, weighed down by the manufacturing sector. And that could potentially worsen with the latest US ban on Huawei.

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SINGAPORE — Private sector economists say initial hopes for the Singapore economy to recover in the second half of 2019 have dimmed now that global technology firms have been swept up in the trade dispute between the United States and China.

The latest setback for the economy comes as Singapore’s official economic growth forecast was slashed on Tuesday (May 21), and the Republic recorded its weakest growth in a decade.

The trade war between the world’s two biggest economies has broadened into a “tech war”, noted Maybank Kim Eng economist Chua Hak Bin, after the US banned its companies from doing business with Chinese firm Huawei unless they have the necessary licences.

This would put additional pressure on the electronics cluster in Singapore, which has already been winding down from its cyclical peak over the past few quarters, noted economists.

On Tuesday, the Ministry of Trade and Industry (MTI) downgraded its gross domestic product (GDP) forecast for 2019 with growth expected to come in between 1.5 and 2.5 per cent, compared with the initial forecast of between 1.5 and 3.5 per cent.

The Republic’s economy grew 1.2 per cent for the first three months of this year, compared to the same period in 2018. It is the slowest growth in just under a decade — since the economy contracted 1.2 per cent in the second quarter of 2009 in the wake of the global financial crisis.

The downgrade by the MTI signals “falling optimism” as the outlook on Singapore’s economy grows increasingly cautious, said DBS Bank Irvin Seah.

'DIMMER BY THE DAY'

Given that initial hopes for a slight recovery in the second half of 2019 were dependent on the US and China ironing out a trade deal, the escalating tensions between the two — with Huawei now thrown into the mix — mean that such hopes are getting “dimmer by the day”, said economists.

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Last week, US President Donald Trump barred US companies from using foreign telecoms equipment deemed a security risk — a move that appeared to be directed at Huawei, the world’s biggest supplier of telecommunications network equipment.

“It’s getting harder and harder to expect a meaningful rebound in the second half (of 2019) at this rate,” said Barclays economist Brian Tan.

When asked at a media conference on Tuesday how these recent moves would impact Singapore, the MTI’s permanent secretary Gabriel Lim said that the ministry’s projections are based on “a much broader suite of factors beyond any single company or any single issue”.

Nevertheless, Trade and Industry Minister Chan Chun Sing warned last Tuesday that the global economic situation has worsened and Singaporeans need to brace for challenges ahead. Commenting on the US-China trade war, Mr Chan said this could pose significant challenges for Singapore’s economy in the coming months

Dr Chua said the involvement of tech giants in the trade war would worsen the disruption in the electronics supply chain, which has already been affected by the tariffs US and China have earlier imposed on each other.

Singapore electronic manufacturers who export their components to smartphone makers in China, for example, would “feel any fallout” if the viability of these China companies is being threatened.

The ban has already led to some tangible consequences, with US tech giant Google announcing that it is blocking Huawei phones from updates to the Android operating system.  

The delay in the global rollout of 5G cellular network, as a result of the US’ latest move, would also weaken external demand for such electronic hardware, said Mr Seah.


ELECTRONICS SLOWDOWN TO EXACERBATE

The electronics industry is expected to face “strong headwinds” in the next few months as Singapore’s exports would likely weaken, said Mr Lim.

The electronics and precision engineering clusters have already contracted for the previous two quarters, and has dragged on the performance of the manufacturing sector as a whole. Manufacturing output shrank 0.5 per cent in the first quarter compared to a year earlier. It was the sector’s first contraction in three years, after experiencing two years of robust growth.

Looking ahead, MTI's Mr Lim said the manufacturing sector is likely to see a “sharp slowdown”.

DBS' Mr Seah said the slowdown in the global electronics cycle would be further exacerbated, with “digital sovereignty” now a point of contention in the trade dispute between the US and China. 

The US has said the Chinese government could use Huawei equipment to spy on Americans.

Mr Tan from Barclays said manufacturing, once the main driver of Singapore’s economy, is now a “key source of weakness”, and that it is not expected to pick up for the rest of this year.

Despite the lacklustre external environment, Oversea-Chinese Banking Corporation (OCBC) economist Selena Ling said that Singapore still has enough “fiscal ammunition” that could be spent “if it is needed”.

With a projected deficit of about S$3.5 billion for the financial year of 2019 as announced during the Budget statement earlier in February, the Government is expected to accumulate an estimated surplus of about S$15 billion at the end of this financial year.

She added that the “bigger concern” would be whether the services sector continues to show signs of weakening in the months ahead, given that the sector makes up two-thirds of Singapore’s economy and is the biggest employer and creator of jobs.

The downward revision of the first quarter’s GDP from the advanced estimates of 1.3 per cent was due to the services sector not doing as well as expected, she added.


LABOUR MARKET 'HOLDING UP'

Concerns on the gloomy economic outlook aside, Mr Tan said that one positive is that the labour market in Singapore is still “holding up”.

He explained that companies usually do not hire or fire based on quarterly movements in GDP figures and that there is usually a lag in how the labour market responds to economic growth.

However, he cautioned that continued weakness in the economy could seep into the labour market in the months ahead.

For example, a slowdown in demand for electronic exports could lead to these companies not being able to hire more workers. This could lead to a point where there are not enough new jobs to soak up demand from new workers joining the workforce.

Despite the grim outlook, Ms Ling said that there will be a “little bit of uptick” in the second half of 2019 owing to base effects.

This means that year-on-year third and fourth quarter growth numbers would improve as the economy grew more slowly in the second half of 2018 — expanding only 3.9 per cent — as compared to the first half of 2018, which grew 8.8 per cent.

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