Singapore Vulnerable If US Falls Into Recession

Singapore’s economy could get a shock if the U.S. falls into recession, warned both ratings agency Fitch and investment bank, Daiwa Capital Markets.

Three laboratory technicians using microscope
Imagemore | Getty Images
Three laboratory technicians using microscope

According to a Fitch report released Friday, if there is a recession in the U.S., Singapore “would experience the largest cumulative negative shock to GDP of 4.1 percentage points from 2011 to 2013.”

This is because Singapore’s trade with the U.S. accounts for about 20 percent of its GDP – the largest exposure among emerging Asian economies.

Earlier this month, data showed that Singapore’s economy contracted by a more-than-expected 7.8 percent in the second quarter as economic growth slowed due to a sharp drop in manufacturing output.

The ratings agency believes the risk of the U.S. tipping back into recession has increased given the fall in consumer spending, weak labor and housing markets, the resurfacing of Europe’s sovereign debt woes, as well as geopolitically-induced oil price spike.

That has led Fitch to downgrade its forecasts for U.S. growth to 1.8 percent in 2011 from 2.6 percent and to 2.3 percent in 2012 from 2.8 percent.

Based on a stress test simulated by Fitch, in which the U.S. economy falls back into a recession for three consecutive quarters beginning in the third-quarter of 2011, Asian economies could see a repeat of what happened in 2008, where the region’s manufacturing sector was hurt by a slowdown in the U.S. and China.

Daiwa has also revised down its growth forecast for Singapore based on a possible recession in the U.S. and euro zone. It now expects Singapore’s economy to grow 4.6 percent in 2011, from an earlier estimate of 6.4 percent. For 2012 it has revised down the GDP figure to 3.9 percent from 5.3 percent.

According to P.K. Basu, Managing Director and Chief Economist at Daiwa Capital Markets, “Singapore, as an export-dependent economy, is especially vulnerable” to a slowdown in the G2 economies.

However, Basu does not expect Singapore to fall into recession.

“We do not expect Singapore to face a repeat of the recession of the fourth-quarter of 2008 to second-quarter of 2009 because domestic demand is likely to remain strong,” Basu added in his note to clients.