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Commentary: How will the dominoes fall on Singapore if US, Europe slide into recession?

With recession an increasing risk in the United States and other major economies, slowing growth overseas will affect Singapore’s export-oriented economy, says OCBC’s Selena Ling.

Commentary: How will the dominoes fall on Singapore if US, Europe slide into recession?

People wearing protective face masks in the Central Business District in Singapore on Mar 25, 2022. (Photo: CNA/Gaya Chandramohan)

SINGAPORE: When the United States sneezes, the world catches a cold. The familiar adage kept ringing in my head as a recent sample poll revealed that some 70 per cent of OCBC bank clients expected a global recession within the next 12 months. Persistent inflation was flagged as the biggest headwind facing markets

On Wednesday (Jul 27), the US Federal Reserve raised interest rates for the fourth time this year by an aggressive 75 basis points, saying another “unusually large” hike could come in September, as it believes the US economy can withstand the tight financial conditions. But industry observers seem to think it is ready to risk recession to curb the country’s 40-year high inflation.

Looking back to 2008, when the US economy was in recession during the Global Financial Crisis (GFC), Singapore also entered a recession.

So though Singapore does not expect a recession in 2023, the growth prognosis is fraught with significant uncertainties. What happens when everyone else slides into recession?


The Bloomberg United States Recession Probability Forecast has been rising since the start of the year and currently indicates markets now expect a 40 per cent chance of US recession.

For a full-fledged recession to be declared for the US, the National Bureau of Economic Research (NBER) needs to see a significant decline in economic activity that is spread across the economy and lasts more than a few months. The NBER is unlikely to officially call the US recession until it is well underway.

A view shows people against buildings in the financial district in Singapore on Apr 14, 2021. (Photo: AFP/Roslan Rahman)

This risk of slowing growth is even more significant in Europe, which is most exposed to the fallout from the Russia-Ukraine war and embroiled in an energy crisis amid record-high inflation and rising costs of living. Political turmoil in Italy could also make it more challenging for the euro zone to act cohesively.

This did not deter the European Central Bank (ECB) from hiking its policy interest rates for the first time in eleven years by a whopping 50 basis points.

The UK economy is also primed to slip into a recession in 2023 even as the Bank of England hiked interest rates for the fifth consecutive time this year and is considering a 50 basis point hike in August.

China is also facing significant challenges in a sluggish economy hit by stringent pandemic measures and a property crisis, and may well undershoot its 5.5 per cent growth target this year.  


Slowing external growth momentum will weigh on Singapore, being a highly export-oriented economy.

The Monetary Authority of Singapore has said that trade-related sectors will likely be affected in the second half of this year, but domestic-oriented and travel-related sectors should continue their recovery and support economic expansion. Singapore’s full-year growth should still come in around the 3 per cent to 5 per cent forecast range. The International Monetary Fund’s 2022 growth forecast reflects a similar situation. 

The three top markets, namely US, the euro zone and China, account for nearly 40 per cent of Singapore’s total non-oil domestic exports (NODX) in 2021 and the first half of 2022, suggesting that any slowdown or recession on their part could substantially dent demand for our exports.

Moreover, given their status as major growth drivers, the transmission channels could extend beyond trade to include foreign direct investments, capital flows and even appetite for hard assets like property and tourist flows.  

However, it is not all doom and gloom – key Southeast Asian trading partners like Malaysia, Indonesia and Thailand have benefited from the reopening of their borders and improved private consumption, and their market share of Singapore’s NODX is about 16 per cent.

In fact, China-ASEAN trade flows have been very buoyant for the first five months of 2022, suggesting that regional economic integration and improved domestic demand trumps China’s zero-COVID lockdowns and supply chain bottlenecks.

In particular, manufacturing and electronics, specifically semiconductors, have been proving to be a lifesaver for growth for the last two plus years during the pandemic. This is backed up by strong pipeline of fixed asset investments committed which amounted to S$17.2 billion in 2020 and S$11.8 billion in 2021, which reinforces the attractiveness of Singapore as an investment destination and ensures a pipeline of more than 17,000 jobs over the next five years.


What else can Singapore do to strengthen our economic resilience or cushion any potential adverse impacts from a synchronised growth downturn in our major trading partners?

Fiscal policy may again be the first line of defence, whether through stimulating government spending such as infrastructure investments or targeting fiscal transfers to specific segments like vulnerable households or small and medium enterprises.

The IMF had also concluded that Singapore is well-positioned to withstand medium- and long-term challenges such as higher projected spending related to ageing, climate change, public housing and infrastructure needs, as Singapore has the policy room to run a more accommodative fiscal position if the need arises.

In June, a S$1.5 billion package was unveiled to assist households and businesses with rising cost-of-living issues without tapping past reserves. With inflation not yet at its peak, there will be growing calls for more assistance for vulnerable groups in Singapore, especially since policymakers have indicated they intend to push ahead with the planned GST hike starting from January 2023.

A YouGov survey indicated that a majority (86 per cent) want the Government to do more to help people feel secure amid sharp price rises. This is despite the tight domestic labour market with unemployment rates declining back to pre-COVID levels and resident wage growth surging by 7.8 per cent in the first quarter of 2022.

MAS has cautioned that overall inflationary pressures will remain elevated in the months ahead, reflecting underlying constraints in global commodity and labour markets. Singapore has kept up consumption while companies face wage pressures in a tight labour market, which increases the likelihood of higher input costs being passed on to consumers.

It remains to see if the aggressive monetary policies of other central banks will successfully bring down inflation without their economies sliding into a recession. And Singapore will be paying close attention to which way the dominoes fall.

Selena Ling is the Chief Economist and Head of Treasury Research and Strategy at OCBC Bank.

Source: CNA/ch


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