Business closures exceed newly-formed firms in Dec

Business closures exceed newly-formed firms in Dec

The number of companies shutting down exceeded newly formed firms in December - the first time this has happened since the 2009 recession.

A total of 4,771 companies were formed in December last year, but 7,237 ended their operations, the Department of Statistics data showed. The last time the number of business closures exceeded new firms opening occurred in 2009.

While the situation has eased in January, it is clear that conditions remain harsh and sentiment is now very low, market watchers said.

"While we saw a sharp fall in January's business cessations, the overall trend still tells the same story - a cyclical slowdown alongside economic volatility," said HSBC economist Joseph Incalcaterra.

"We are seeing increasing signs that manufacturing weakness is impacting the broader economy - particularly the services related to trade and the energy sector.

"Accordingly, we expect growth in the services sector to soften in the first half of 2016, and possibly contract sequentially in the first quarter," he said.

Other indicators reflect a similarly bleak picture.

The manufacturing Purchasing Managers' Index for February showed that new export orders declined for the 13th straight month, again underlining the likelihood of a technical recession in the first half this year.

The Commercial Credit Bureau's quarterly business optimism survey found that sentiment for the second quarter showed only a marginal improvement from the record low level in the first quarter.

Mr Kurt Wee, president of the Association of Small and Medium Enterprises, said small businesses are the ones bearing the brunt of the downturn as many do not have the means to withstand economic shocks.

"The ones that are still in business are often forced to slash their price and, hence, profit margin.

"With the cost of borrowing looking to rise this year, the SMEs are not seeing the end of their hardships yet.

"Not a sharp collapse, maybe, but certainly a long-drawn-out deceleration," Mr Wee cautioned.

But UOB economist Francis Tan stressed that while the business environment is certainly challenging, the cessation data is too rudimentary to suggest that a recession - or a business sector collapse - is unfolding.

Said Mr Tan: "There are several ways to look at the data. I think the lower number of company formation can be due to a lack of manpower. Also, the size of the companies that closed shop is unclear. Many could be very small firms that hired very few people.".

His view was supported by a drop in the seasonally adjusted jobless rate from 2 per cent in September to 1.9 per cent in December last year. The median gross monthly income grew 4.7 per cent from 2014's $3,770 to $3,949 last year.

Mr Tan added: "We have to worry when there is a huge structural loss of jobs, which is not yet the case.

"I am still cautiously optimistic - sentiment will still be weak in the first half, but we may see a pick-up in the second half."

This article was first published on March 4, 2016.
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