Red flags for Singapore economy as exports slump

Singapore's business district skyline at dusk
Stephen Studd | The Photographer's Choice | Getty Images
Singapore's business district skyline at dusk

Exports in wealthy trade-dependent Southeast Asian nation Singapore continued to slump in June, contracting well below expectations and economists say this could weigh on economic growth in the second half of the year.

The tiny island-nation's non-oil exports fell 8.8 percent year on year in June, almost double the 4.6 percent contraction in May and worse than a Reuters consensus of a 5.2 percent drop, data showed on Wednesday.

The export numbers paint a very different picture of the health of Singapore's economy compared to the advance estimate for the second quarter gross domestic product (GDP) released last Friday, which showed the economy growing the most in over two years at 15.2 percent from the first quarter, beating expectations. Year on year growth for the quarter also came in at a better than expected 3.7 percent.

(Read More: Singapore growth soars 15.2% in second quarter)

The weakness in the export sector could lead to a downward revision of last week's robust GDP estimate, Barclays warned in a note.

"We think the advance estimate of second quarter GDP, which is based on data for April-May, will be revised lower next month once June indicators are incorporated," Joey Chew, economist at Barclays said.

Barclays also expects some growth "payback" in third quarter, saying "it is difficult for Singapore's extremely trade-dependent economy to continue to grow at such a robust pace when the global environment remains so subdued."

Non-oil exports to the European Union (EU), which accounts for 12 percent of market share, were the biggest drag, falling 33.6 percent year on year in June.

(Read More: Bottom line on Singapore GDP: curb your enthusiasm)

Pharmaceutical exports suffered one of the biggest drops in the month, down 35 percent year on year, dragged by weak demand from the EU, which is the key destination for this sector.

China, however, was the only major destination for Singapore exports that showed growth in June, up 7 percent on a yearly basis.

But slowing growth in China will result into weaker exports later this year, Hak Bin Chua, ASEAN economist at Bank of America Merrill Lynch said.

"Sluggish external demand will continue to weigh on Singapore's growth prospects, in our view," Chua said in a note.

(Read More: IMF flags top three threats to global growth)

Daniel Wilson, Asia-Pacific economist at ANZ, backed that sentiment saying that unless there is a pick-up in advance markets of the U.S., Europe and Japan, the rebound in Singapore's economic growth in the second quarter will "almost be a one off."

"The exports in Singapore haven't really responded to the strong manufacturing. I think what we're seeing at least from the production side is that there has been some buildup in inventories, so unless we see a pickup in external demand, production should slow into the third quarter and into the second half of the year," Wilson told CNBC.

Singapore's purchasing managers' index (PMI) in June, released earlier this month, did show a rise for a fourth consecutive month to 51.7, staying above the 50 point level that separates expansion from contraction.

Citi, however, says it may be too early to talk about revisions to Singapore's growth forecasts and the industrial production data next week may give a clearer picture of which way the economy's heading.

"We hesitate to read too much into the data for hints of revisions to the second quarter GDP advance estimates released just last week, which likely already had early indication of today's data. In any case, the non-oil exports and industrial production data can diverge significantly," Kit Wei Zheng, economist at Citi said in a note.

By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu