World Economy

Singapore is about to enter technical recession

A tourist takes a 'selfie' on a bridge overlooking the Singapore skyline choked with smog on September 29, 2015.
Roslan Rahman | AFP | Getty Images

Third-quarter gross domestic product (GDP) on tap this week may unveil a foggy economic outlook for Singapore, mirroring the hazy skies that have shrouded the Southeast Asian island-state for the past month due to seasonal pollution from the burning of Indonesia's forests and land.

Advance estimates for the July-September quarter, scheduled for release at 8am local time on Wednesday, are expected to show the economy growing 1.3 percent on-year, according to a Reuters poll.

However, on a quarter-on-quarter basis, the economy likely shrank 0.1 percent from the previous three months on an annualized and seasonally adjusted basis, the Reuters poll said, following a 4.0 percent contraction in the April-June quarter.

This would put Singapore in a technical recession, which is commonly defined as two successive quarters in which the economy contracts from the previous quarter.

Singapore's economy last went through a recession in 2008 when a slowdown in U.S. and European consumer demand hit the country's crucial manufacturing sector.

This time round, a confluence of factors such as erratic global demand led by a slower-growing China – a major market for Singapore – and domestic issues such as a tight labor market are among the culprits dampening the outlook of the affluent city-state.

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Industrial output declined more than expected in July and August, while the all-items consumer price index fell for the 10th consecutive month in August to a post-global financial crisis low.

Meanwhile, the all-important exports sector is likely to stay in the doldrums. September non-oil domestic exports (NODX) due on Friday, likely fell 3.6 percent on-year, said economists polled by Reuters, after an 8.4 percent slide in August and 0.7 percent slip in July.

"Exports and industrial output have slumped hard alongside port activity as a consequence of China wobbles exacerbating global demand deficiency. And while not as dire as externally-focused activity, domestic demand has also been dented by a confluence of softer credit growth, labor supply constraints and broader economic drag from the cooling property market," Vishnu Varathan, senior economist at Mizuho Bank, wrote in a note released Monday.

"With Singapore mired in downturn derived from sustained and broad-based factors rather than quirks of GDP sub-component volatility, any technical recession is not merely fleeting technicality," he added.

MAS: To ease or not?

Given the downside risks to growth and inflation, experts believe the Monetary Authority of Singapore (MAS) will loosen monetary policy for the second time this year when it releases its semi-annual policy statement also at 8am local time on Wednesday.

According to a Reuters poll, 12 of 18 analysts expect the nation-state's central bank to ease its exchange-rate based policy. Out of the remaining 6 analysts who predict the MAS to keep all policy settings on hold, two said the Singapore dollar's policy band could be widened to accommodate higher volatility.

Rather than use interest rates, Singapore's central bank manages its monetary policy by adjusting an undisclosed trading band based on a basket of currencies weighted to reflect trade levels with the city-state.

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Earlier in January, the MAS caught markets by surprise by reducing the pace of the Singapore dollar's appreciation against the currency basket in an off-cycle move, but left monetary policy unchanged when it met in April.

Economists betting on an easing move this week include Bank of America Merrill Lynch (BofAML). Analysts expect the MAS to shift to a neutral bias and re-center the nominal effective exchange rate (S$NEER) band "in response to a probable technical recession amid the absence of inflationary pressures," according to a note released Monday.

Others expect the central bank to be less aggressive, opting to lower the midpoint of the policy band which weakens the local currency.

"The MAS has maintained a modest appreciation of the S$NEER policy stance. If this continues, the MAS would have two choices: spend reserves defending the band or relax the appreciation policy. With an economy facing the risk of a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain. Challenges are compounded by the potential capital flight that could result from higher interest rates elsewhere and fears of further Asian currency devaluations," said a note from DBS Group Research released on October 6.

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Spread betting firm IG, meanwhile, describes the policy decision as a close call given renewed strength in crude oil prices and lingering uncertainties over the timing of an interest-rate rise in the U.S.

"Heightened growth risks point towards scope for the MAS to ease policy but the current low inflation environment reflected the effects of low energy and commodity prices," market strategist Bernard Aw wrote in an email note on Monday.

"[With] commodities having a resurgence recently, the medium-term outlook for inflation may be looking up," Singapore-based Aw added. The inflation outlook is a key determinant in the central bank's policy decisions.