Singapore economic contraction to ease after record fall in Q2

Author: Nurluqman Suratman


SINGAPORE (ICIS)--Singapore's economy, which is now in recession, may get some reprieve in the second half, on the strength of the government’s massive fiscal stimulus package and some possible improvement in external demand.

The rate of contraction should moderate after shrinking at a record annualized rate of 12.6% in April-June as a direct result of a soft lockdown implemented to contain the spread of the novel coronavirus pandemic in the city state.

After posting two consecutive quarters of GDP decline, the economy is now in a technical recession.

On a quarter-on-quarter seasonally-adjusted annualised basis, the economy shrank by a record 41.2% in the second quarter, much steeper than the 0.3% decline in the March quarter, preliminary data from the Ministry of Trade and Industry (MTI) showed on Tuesday.

The economy is “mired deep in recession”, with the first-half average contraction at 6.5% based on the government’s Q2 GDP estimates, Singapore-based OCBC Bank said.

The rate of contraction should moderate in the second half as the southeast Asian economy re-opens, with the possibility of increased exports and higher pharmaceutical output.

“We believe that the contraction in GDP will trough in the second quarter of 2020, given the circuit breaker and Phase One restrictions in this period,” Singapore-based UOB Global Economics & Markets Research said in a note.

The government’s soft lockdown called “circuit breaker” from 7 April to 1 June has entailed suspension of non-essential services and closure of most workplace premises. A phased easing of pandemic-related restrictions is underway.

“With strict containment measures lasting over 10 weeks in Q2, the service and construction sectors bore the brunt of the shock,” said Seung Eung Jun, economist at research firm Oxford Economics, in a note.

“Going forward, we expect growth to rebound in H2 supported by a massive fiscal response,” Seung said.

Singapore has introduced four stimulus packages worth nearly Singapore dollar (S$) 100bn ($72bn), equivalent to 20% of its GDP, since the coronavirus outbreak.

On the assumption that a major second coronavirus wave is avoided domestically and globally, Oxford Economics expects some upside risks to its 2020 Singapore GDP forecast of a 6% contraction.

“But if global demand suffers another blow from a re-imposition of lockdowns around the world, we are likely to see a more ‘W-shaped’ recovery,” Seung said.

For the whole of 2020, Singapore’s economy is projected to contract by 4.0% to 7.0%, according to MTI.

“Bright spots can still be observed despite the economic drags. Pharmaceutical production and exports may be a boon for Singapore’s overall manufacturing and trade landscape,” UOB said.

“Uncertainty surrounding the length and severity of Covid-19 [coronavirus disease 2019], as well as the emergence of renewed US-China tensions continue to cloud Singapore’s trade prospects,” it said.

The economy will continue to be weighed down by weakness in overseas demand amid a deterioration in global economic activity, hitting its wholesale trade, transportation and storage operations as well as its manufacturing, sector.

Singapore’s June-quarter manufacturing posted a 2.5% year-on-year growth, moderating from the 8.2% expansion in the first quarter of 2020, primarily due to a surge in output in the biomedical manufacturing cluster.

"On the other hand, weak external demand and workplace disruptions during the circuit breaker period weighed on output in the chemicals, transport engineering and general manufacturing clusters," the MTI said.

The construction sector contracted by 54.7% on a year-on-year basis in the second quarter, a significant deterioration from the 1.1% decline in the previous quarter.

Most construction activities were halted during the “circuit breaker”, with huge clusters of infections discovered at dormitories of workers in the sector.

Services-producing industries contracted by 13.6% on a year-on-year basis in the second quarter, steeper than the 2.4% decline in the previous quarter.

Focus article by Nurluqman Suratman

Additional reporting by Pearl Bantillo

($1 = S$1.39)

Visit the ICIS Coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

Visit the ICIS construction topic page for analysis of the impact on chemical markets and links to latest news.