Q2 upward revision might spare Singapore from technical recession: OCBC

Services sector most likely to get revised higher and save the day.

Here's more from OCBC:

Much ado over a technical recession, but Q3 still likely to contract qoq. Market expectations for a Q3 technical recession (defined as two consecutive quarters of sequential contraction) has been building following a slew of disappointing economic data, especially from the manufacturing sector. Our existing forecast is for Q3 growth to come in at +1.4% yoy (-0.3% qoq saar). However, a technical recession may be avoidable if the Q2 growth estimates, initially tipped at +2.0% yoy (-0.7% qoq saar), could be revised higher - it only needs to be shaded up by 0.2% points to 2.2% yoy to be flat qoq saar in Q2 2012.

The most likely candidate for the Q2 upward revision could be the services sector which only expanded a tepid 0.8% yoy in Q2, compared to manufacturing’s +4.5% and construction’s 5.3% growth. Assuming that Q2 GDP growth does get revised higher to reflect at least flat qoq saar growth, then our Q3 growth forecast could shade even lower to -1.0% qoq saar, but we retain our +1.4% yoy call.

It is arguable that a technical recession story would help justify a policy easing, and conversely, the absence of a technical recession may bolster the case for policy status quo. Nevertheless, in our view, the more important factors would be if there is any significant changes to the 2013 growth and inflation outlooks – for instance, anticipative of a significant deterioration in the global growth trajectory in H1 2013, especially for China. The twin challenges of the upcoming US’ fiscal cliff and the deepening recession story for the Eurozone economies also remain intact. The official 2013 growth forecast is only due at a later date, but the median growth forecast currently stands at 3.9% yoy for both FocusConsensus and the Sep MAS professional forecasters survey, which is higher than our 3.5% yoy 2013 forecast.

For now, the risk of headline inflation climbing higher looks slightly more remote now that crude oil prices have retreated, and the recent property measures may cool market sentiment at least in the near-term. That said, the threat from QE3-fuelled liquidity coupled with a fairly tight domestic labour market given the foreign manpower constraints, suggest that the core inflation may not subside below 2% handle easily, and that may be the policy focus at this juncture. The SGD NEER is trading +0.9% from parity, so there’s conceivable policy room to stay or ease.