SINGAPORE: Amid early signs that the slump in the crucial manufacturing sector is easing, some economists are saying the worst may be over for the Singapore economy.
However, they cautioned that recovery will be “sluggish” and “slow going” as risks ranging from a protracted US-China trade rift to protests in Hong Kong, remain.
Official data released on Thursday (Nov 21) showed a slight uptick in Singapore’s economic growth for the third quarter. The economy expanded by 0.5 per cent compared to a year ago, higher than an official flash estimate of 0.1 per cent and the revised 0.2 per cent growth in the previous quarter.
Economists attributed this to a better-than-expected showing in manufacturing, which has been the main drag on growth for 2019 as trade tensions and a downswing in the global tech cycle took a toll on the electronics cluster.
The sector shrank by 1.7 per cent year on year in the third quarter – a less severe contraction compared to the 3.3 per cent drop in the previous three months, according to figures from the Ministry of Trade and Industry.
A return to positive growth awaits in 2020, added MTI, as the electronics and precision engineering clusters see a “gradual recovery”.
Economists echoed that and said it will help brighten up the growth numbers moving forward.
“One of the main drags to growth, the contraction in the electronics sector should ease in the quarters ahead. The global downturn in the sector looks to have already bottomed out, meaning year-on-year growth should start to improve from around the end of this year,” said Mr Alex Holmes from Capital Economics.
“We think Singapore’s economy (has) passed the worst and that growth should continue to slowly recover,” he added.
“There are signs that manufacturing and exports have bottomed out ... as the tariff shock dissipates and some firms restart their capex (capital expenditure) plans,” said Maybank Kim Eng economist Chua Hak Bin.
Apart from the cyclical recovery in manufacturing and exports, there are structural and “exceptional” factors that will also help to underpin growth, according to Dr Chua.
The former refers to the structural shift in the manufacturing supply chain towards Southeast Asia, as companies diversify their over-reliance and risks from China amid trade tensions. This supports financial activities like business lending in Singapore.
Singapore’s hospitality, food and beverage and business services have also had a lift by the “exceptional shock” and diversion of visitors and MICE events from Hong Kong. With the protests still ongoing, this “exceptional” driver could continue into next year, added Dr Chua.
Other parts of the economy, such as construction, finance and insurance, information and communications, education, health and social services, should continue to hold up and support growth, said UOB economist Barnabas Gan.
Some private-sector economists have revised their full-year growth forecasts upward following the better-than-anticipated data on Thursday.
Capital Economics, for instance, is now penciling in 0.7 per cent growth, up from 0.5 per cent. Barclays also raised its 2019 projection by 10 basis points to 0.7 per cent.
For 2020, estimates from the private-sector economists range from 0.9 per cent to 1.6 per cent – within MTI’s newly-announced forecast of 0.5 per cent to 2.5 per cent.
CAUTIOUS RECOVERY, AS RISKS REMAIN
But economists were quick to stress that several downside risks continue to loom large.
Barclays economist Brian Tan, for instance, pointed to the growing divergence between the exports and production of electronics.
While electronics exports have been rebounding since June, electronics industrial production (IP) has continued to sink. This divergence should not be dismissed, he said.
“In the past, electronics IP has been quite capable of prolonged and remarkable divergence from electronics exports. This could offset any continued pick-up in non-electronics IP, where we would note that the recovery in non-electronics exports has also been more modest than that of electronics,” added Mr Tan.
Economists also pointed to the fact that several of the external risks will continue into 2020.
“There’s a good chance that the recovery will materialise next year but given that the uncertainties this year will still be around next year, it will be a sluggish one.” Dr Chua said.
Describing the recovery as likely to be “slow going”, Mr Holmes noted that global growth, while nearing the bottom, is set to remain weak for some time. Singapore, being one of the most trade-dependent economies in the region, relies on the health of the global economy.
Any re-escalation in the China-US trade war will be a further downside risk, he added.
A scheduled tariff increase in December on consumer electronics, such as smartphones, remains on the table.
Said Dr Chua: "That's the last remaining tranche of tariffs that includes some of the most highly visible consumer electronics products. If that happens, the Americans could cut back on some of these consumer electronics, which Singapore is very much plugged into the supply chain for."
Apart from trade concerns, OCBC’s head of research and strategy Selena Ling cited the ongoing Hong Kong Human Rights and Democracy Act, which was passed by US lawmakers on Wednesday.
The Bill requires the US president to annually review the favorable trade status that Washington grants to Hong Kong, and threatens to revoke the coveted status that the semi-autonomous Chinese territory enjoys with the United States if its freedoms are quashed.
The measure now heads to US President Donald Trump, who has not decisively said whether he will sign it, reports have said.
While Ms Ling does not think that President Trump will veto the Bill, any immediate fallout “may be somewhat blunted by the probability that the US is unlikely to trigger a change in Hong Kong’s status for now”.
“Especially since it will take the form of an annual review that is more advisory in nature, and any sanctions may also be limited,” she added.
Brexit-related uncertainties also continue to linger, while the possibility of a rate cut next year by the US Federal Reserve remains on the table as the latest meeting minutes showed “more knuckle-cracking concerns about downside risks to the economic outlook”.
“In summary, it is still too early to break out the champagne yet,” concluded Ms Ling.