Singapore sees broader weakening in economic activity

The global economic outlook has dimmed from six months ago, and this discernible weakness in growth expectations will weigh on Singapore's GDP this year more broadly than before, said the Monetary Authority of Singapore (MAS) on Wednesday.

In its biannual macroeconomic review, the central bank stuck to an earlier guidance of 2016 GDP growth at between one and 3 per cent.

Striking a guarded tone, MAS warned of pockets of corporate stress, easing margins, and weaker business expectations, though the view does not suggest a recession.

The subdued global growth expected in 2016 reflects the low nominal growth in many advanced economies in the wake of the global financial crisis (GFC).

"Against the downshift in the external environment and volatile financial markets early this year, economic activity appears to have weakened across more sectors into Q1," said MAS.

Global growth is projected at 3.8 per cent in 2016, slightly below the 3.9 per cent recorded last year, MAS said. It is then expected to edge up marginally to 4 per cent in 2017.

Growth in Singapore has been driven by three clusters: modern services, trade-related industries, and the domestic cluster. Over the last few years, the modern services cluster - led by a surge in gains in the financial sector - has expanded strongly.

Growth from activities concentrated at home, such as construction and healthcare, has risen steadily, buoyed by public projects.

Performance in trade-related industries has, however, deteriorated, amid persistent weakness in the external environment.

But in early 2016, the impact of weaker external demand broadened, reflected by a step-down in exports across most regional economies. The finance industry pulled back, as offshore lending such as trade finance eased. Corporate demand for business services, such as consultancy, weakened. Meanwhile, the domestic retail segment has been hit by weakening consumer confidence.

In the first quarter, the trade-related sector posted a surprising upturn, though this was due to "idiosyncratic factors". The pharmaceuticals segment, which is typically volatile, saw a large surge in output from three months ago.

The Singapore economy grew by 1.8 per cent year on year in the first quarter ended March 31, 2016, unchanged from the previous quarter, flash estimates this month showed. While this beat market forecasts, growth was flat on a quarter-on-quarter seasonally-adjusted annualised basis, a contrast to the 6.2 per cent expansion in the preceding quarter.

"Growth in capital formation in the G-3 is likely to be lower than last year, which could weigh on Singapore's trade-related industries given their exposure to the global investment cycle," said MAS.

Singapore's electronics and precision engineering industries are the most vulnerable to a pullback in foreign investment, it noted.

"The sluggish investment climate stems in part from the global manufacturing malaise that has persisted in the post-GFC era," said MAS. In China, fixed asset investment has recently been on a secular downtrend.

Growth in Asia excluding Japan will be hampered by the sharp run-up in debt in the post-GFC period, with China seeing the most pronounced lift in leverage, MAS said. One market view is that China should be able to grow its way out of the debt burden.

Over time, the rebalancing of the Chinese economy towards consumption should support demand for imported services, MAS said.

It noted that the quarterly SME business survey, conducted by the Singapore Business Federation and DP Information Group, showed that business sentiment was at its lowest level since 2010. "Given the more downbeat external outlook, corporate margins could come under further strain in the near term."

This article was first published on April 28, 2016.
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