Economy to contract 1% in Q1 amidst nCov outbreak: analysts

The manufacturing sector’s PMI will likely return to contraction in February and March.

Singapore’s GDP will likely contract by 1% in Q1 compared to a year ago on the back of the novel coronavirus (nCov) outbreak and subsequent border control measures, reports Maybank Kim Eng.

Maybank also downgraded its 2020 full-year GDP forecast to 1.1% growth, from 1.8% previously.

On January 31, the government barred all foreign travellers from China as the number of confirmed cases both in China and in Singapore rose. Analysts expect the impact of the outbreak to mirror that of the SARS episode, with the manufacturing, retail trade, transport, hospitality, and business services taking a hit.

“China’s economy is much larger than [the economy] during the 2003 SARS crisis ($19.38t or US$14t versus $2.08t or US$1.5t in 2003) and the impact from a China slowdown will be magnified,” noted Maybank analysts Chua Hak Bin and Lee Ju Ye in a report.

China accounts for 19% of visitor arrivals and 17% of exports in Singapore.

“First quarter GDP will likely contract by about 1% from a year ago, with sharp falls expected in hospitality, transport and retail. Services will likely see the greatest impact, weighed down by accommodation & food services (2% of real GDP) and transportation & storage,” they added.

The two sectors were the hardest hit during the SARS crisis in the second quarter of 2003, plunging by -27% and -11%, respectively.

Further, disruptions to China’s supply chain will have knock-on effects on manufacturing and reverse its recovery. Chua and Lee noted that the PMI numbers will revert to contraction territory in February and March as a result of recent developments.

But a technical recession is unlikely. “There is sufficient room for the $NEER to ease within the policy band. Our FX team estimates that the $NEER has fallen from 1.7% above the midpoint in mid-Jan to around 0.5% currently,” the report stated.

Further, the government is expected to employ fiscal measures, including a targeted relief package, to support growth during this period, which should buoy the economy away from a recession.

“We expect the negative impact to be short-lived, with growth rebounding from the second quarter onwards, mirroring the V-shaped recovery in Q3 2003. China’s and other governments’ quicker and aggressive policy response could intensify the short-term negative impact on GDP growth, but shorten the duration of the outbreak,” the report added.

Financial services, infocomm and construction will likely continue to grow, albeit at a weaker pace.