S'pore unlikely to slip into technical recession despite Q2 contraction, but economists cautious of possibility

SINGAPORE — Private-sector economists cautiously agree with the Government’s assessment that Singapore will avoid a technical recession this year, while adding that the possibility cannot be ruled out entirely.

Their qualified optimism is based on indications that manufacturing might slow further as global demand weakens in the midst of continued high inflation. And although Singapore's services sector is growing at a promising clip, it is still hindered by the prevailing manpower crunch.

The Ministry of Trade and Industry (MTI) on Thursday (Aug 11) announced a somewhat more subdued outlook for Singapore's economy as global conditions deteriorate, and revised second-quarter figures.

In the second quarter of this year, the Singapore economy expanded 4.4 per cent on a year-on-year basis.

However, on a quarter-on-quarter seasonally adjusted basis, it shrank slightly by 0.2 per cent for the April-to-June quarter, a reversal from the 0.8 per cent expansion in the January-to-March quarter.

Asked by the media on Thursday whether the Government expects the economy to continue contracting in the current third quarter, MTI’s chief economist Yong Yik Wei said that the economy appears set to return to quarter-on-quarter growth for the rest of the year.

“So in other words, we do not expect a technical recession,” she said. 

“But of course, I will also say that there are risks because of the global economic environment having weakened.”

A technical recession occurs when the economy contracts in quarter-on-quarter terms for two successive quarters.

While this is a widely accepted definition, current global conditions have fuelled a debate over whether it applies at present. The United States recently recorded two straight quarters of economic contraction but the Biden administration insists that with the labour market so strong, the US is not in recession.

Singapore-based economists previously told TODAY that stagflation — where a stagnant economy meets high inflation — was not to be expected given the current economic situation, though the risks of it happening may increase.

BRIGHT SPOTS MAY BE DIMMED BY MANPOWER CONSTRAINTS

Senior economist Irvin Seah from DBS bank said that “there is a good chance” a technical recession can be avoided.

For one thing, he expects China’s economic growth to improve as its Covid-related lockdowns ease.

“And that would have a positive effect on Singapore's growth outlook in the third quarter,” Mr Seah said, given that China is a key trading partner.

This is in addition to the growth from the recovering services industry here following Singapore’s reopening, he added.

Similarly, Ms Yun Liu, an economist with HSBC, said that the bank "(does) not think" Singapore will see a technical recession.

"Travel- and consumer-related services will continue to see improvements, offsetting some weakness in the externally oriented sectors," she said.

Ms Selena Ling, chief economist from OCBC bank, said that the professional services sectors are also expected to benefit with the resumption of travel.

However, the experts cautioned that such growth may be tempered by manpower constraints.

Mr Alvin Liew, senior economist from United Overseas Bank (UOB), also expects quarter-on-quarter growth “to return to positive territory” in this third quarter.

However, he voiced concerns over the tight manpower market, on top of “the rising cost issues relating to both wage growth and operating costs of businesses”.

Referring to MTI’s report, he highlighted how the "value-added per actual hour worked" measure eased noticeably to 0.8 per cent year on year in the second quarter of this year, down from 2.3 per cent in the preceding quarter.

As for the unit labour cost for the overall economy, it rose further to 9 per cent year on year from 7.7 per cent over the same period last year.

However, Mr Liew said that the expected increase in the supply of foreign labour as borders reopen will support the existing labour pool, especially within Singapore’s labour-intensive industries.

SLOWING MOMENTUM IN SOME INDUSTRIES

Economist Song Seng Wun from CIMB bank similarly expects the inflow of manpower to help strengthen growth in sectors such as services and construction.

In the broader picture, there is uneven growth across sectors in Singapore, he noted.

He highlighted industries that “benefit from the reopening” such as tourism and aviation, while simultaneously pointing to the “slowing momentum” of industries that are subjected to global demand slowdowns, such as manufacturing.

Depending on how these industries balance each other out, Mr Song expects “a higher chance of another contraction rather than growth” for the next quarter.

He said that even if Singapore sees headline growth, inflation — which is expected to peak in the third quarter of the year — “may take the wind out of nominal growth”, resulting in a contraction in real terms.

Other economists, though expecting a slow positive growth for the rest of the year, are cautious about their outlook.

Ms Ling from OCBC projects a 0.2 per cent growth next quarter on a seasonally adjusted quarter-on-quarter basis.

However, she said that the risk of a potential technical recession “cannot be ruled out” and the chances of avoiding one is “probably close to a 50-50 call for now”.

She added that it "may not take much to tip ... (my) forecast into negative territory" if manufacturing momentum continues to moderate more than expected.

Maybank's economists Chua Hak Bin and Lee Ju Ye, while expecting the economy to continue growing in the second half of the year albeit at a slower rate of 1.3 per cent, said that there is "some risk of a technical recession" if economic growth slows to about 2 per cent on a year-on-year basis.

“The boost from the reopening tailwinds will dissipate, while global headwinds including rising US and global interest rates, China’s slowdown and a probable Europe recession will dampen exports and trade-related services,” they added.