SINGAPORE - Europe is slowly finding its feet again, which bodes well for Singapore's economy, given that the region is among the Republic's top export markets.
Companies across the euro zone are recovering more quickly than expected, recent data shows.
An indicator of private-sector economic activity published last week shows a third straight month of improvement and the first expansion since January last year.
The flash euro zone composite purchasing managers index (PMI), which surveys thousands of firms across the region, unexpectedly jumped to 50.4 this month, from 48.7 last month. Any figure over 50 indicates growth.
In particular, factory activity swelled following a surge in new orders, while hiring improved for the third month in a row.
"The best PMI reading for 11/2 years provides encouraging evidence that suggests the euro area could, at long last, pull out of its recession, in the third quarter," said Mr Chris Williamson, the chief economist at Markit, which compiles the PMI.
Economists say the strengthening rebound, if it lasts, will help boost Singapore's economy in the second half of this year.
Weak exports to Europe were the greatest drag on Singapore's export growth in the first half, with levels down 24 per cent from a year earlier, said Barclays economist Joey Chew.
A dip in drugs output was mainly to blame, as half of Singapore's non-oil domestic exports to the 27-nation European Union are pharmaceuticals, she said.
However, she expects exports to Europe to display stronger growth in the coming months, given the low base last year.
"And with this improvement in business sentiment in Europe, we can expect Singapore's capital goods exports to the region to pick up as well," she said.
The euro zone's PMI readings suggest that this year could be the trough for the region's current growth cycle, said CIMB economist Song Seng Wun.
Coming on top of economic improvements in Japan and the United States, such news would make for an "encouraging" outlook for export-dependent Singapore in the second half of this year and beyond, he noted.
"Festive orders usually start to stream in from the middle of August", so Singapore's exporters should soon get an indication of whether their Christmas will be a happy one, Mr Song said.
Exporters are in dire need of some cheer. Singapore's exports fell 8.8 per cent last month from levels a year ago, after a 33.6 per cent drop in shipments to the EU.
The region was Singapore's top export market in 2011 and last year, but weak demand there in the first six months of this year caused it to lag behind China.
However, China might not hang on to the top spot for long either, as its economy shows signs of losing steam.
The deceleration there and concerns that the US Federal Reserve could cut back its bond-buying programme still cloud Singapore's growth prospects, said Ms Daphne Roth, who heads Asian equity research at ABN Amro Private Banking Asia.
"Singapore will definitely benefit from a stronger pick-up in global economic growth as well as export recovery in the second half of the year as Singapore is a small, open economy," said Ms Roth, who is based here.
"However, China's economic growth continues to disappoint, and this will also have an impact on Singapore," she added.
The tapering of Fed policy and the rising strength of the US dollar will result in funds flowing out from Asia as well, although Singapore is expected to be more resilient to outflows than other countries in the region, she said.
Get a copy of The Straits Times or go to straitstimes.com for more stories.