World Economy

Is Singapore's economy headed for a technical recession?

Economic growth has stumbled in Singapore, with analysts forecasting a rocky path ahead that will include a technical recession.

A recession is defined as two consecutive quarters of on-year economic contraction, while a technical recession would be two quarters of quarterly contraction.

For the third quarter, Singapore's gross domestic product (GDP) grew by 1.1 percent on-year, down from 2.0 percent in the previous quarter, according to final data released by the Ministry of Trade and Industry (MTI) on Thursday.

But on a quarterly basis, the economy contracted by 2.0 percent, weakening from a 0.1 percent on-quarter expansion in the second quarter.

The Singapore dollar fell to its lowest levels since January after the figures, with the greenback fetching as much as S$1.4361 Singapore dollars, compared with S$1.4310 prior to the release.

While both the on-year and on-quarter final figures were an improvement on the advance estimates released earlier this month, that didn't reassure economists much.

"Today's print does not detract from the fact that sequential growth still remains entrenched in negative territory and the economy still runs the risk of a technical recession in the fourth quarter," Weiwen Ng, an economist for ANZ, said in a note on Thursday.

Even the government doesn't hold out much hope for a steep recovery, forecasting the island-nation's economy would grow 1.0-1.5 percent in 2016, narrowing a previous forecast of 1.0-2.0 percent. It forecast "modest" growth of 1.0-3.0 percent in 2017. But it wasn't fully as pessimistic as analysts, with MTI Permanent Secretary Loh Khum Yean saying on Thursday that the "central view" was that the economy would avoid a technical recession in the fourth quarter, according to a Reuters report.

Roadblocks ahead for Singapore economy
Roadblocks ahead for Singapore economy

But even if there were a technical recession, ANZ's Ng said the economy likely wasn't headed for a full-blown calamity.

"The extent of contraction will be mild and more modest than during the decline during the 2008/09 global financial crisis," he said.

The government wasn't entirely alone in its view that Singapore, known as "The Little Red Dot" for its small size on the world map, would avoid a technical recession.

Joseph Incalcaterra, an economist at HSBC, told CNBC's "Street Signs" on Thursday that a technical recession was "highly unlikely," but he added, "it's not necessarily something to rejoice about" as it was mainly because of the base effect of lower figures in the previous periods.

He noted that Singapore's services sector was already in a technical recession, with three straight quarter-on-quarter contractions under its belt for the first time since the Asian Financial Crisis in 1997-1998.

Incalcaterra expected the economy would slow heading into next year as the trade-dependent country would see less benefit from any uptick in U.S. economic growth.

"Growth in the U.S., even though it's been relatively stable, it's much less import intensive than it was in the past," he said.

At least one economist cautioned against reading too much into the single on-quarter contraction.

"GDP growth in Singapore is highly volatile. As a result, the third-quarter contraction is not on its own cause for alarm," Krystal Tan, an Asia economist at Capital Economics, said in a note on Thursday.

But she added, "the economy faces a number of headwinds, which suggests any recovery will be disappointing."

She noted that with the U.S. Federal Reserve widely expected to start hiking interest rates next month, interest rates in the city-state were likely to head higher as well.

"Higher borrowing costs are likely to weaken the housing market further and dampen construction activity. Household and business spending will also be constrained," she said.

Others were expecting the government to step in to bolster the economy.

"I am expecting a more stimulative fiscal budget for 2017," Selena Ling, head of treasury research and strategy at OCBC Bank, told CNBC's "Squawk Box" on Thursday.

"I think the feedback on the ground already sounds like a pretty weak outlook in terms of the corporate sector, especially from the SMEs [small and medium-sized enterprises] so I think there's some anticipation that there'll be some additional help on that front, either on the cost side or in terms of helping them tap growth markets in the region, so it could be Myanmar or Indochina."

Singapore's Raffles Place station during rush hour.
Getty Images

But when it came to the external risks that the MTI highlighted as weighing on the city-state's outlook – such as Brexit, China's slowdown and political risks – she didn't hold out much reassurance.

"There's very little the policy makers can do on the external front. It's more in terms of trying to manage the domestic cost front for now," she said.

Tan of Capital Economics largely agreed.

"Global growth looks set to stay sluggish, so hopes for a robust and sustainable export recovery that helps to offset domestic weakness are likely to disappoint," she said, forecasting the island-nation's economy would only grow 1.5 percent next year, at the low end of the government's forecast range.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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