Recession risks on the rise as services growth sputters

Growth is losing steam, experts say.

Singapore’s economic growth beat market expectations in the first quarter, but experts warn that the risks of a technical recession is rising due to the sharper-than-expected growth contraction in the services sector.

“[The] rapid services deceleration is a cause for concern and could clearly tip the balance for a technical recession ahead,” said Selena Ling, Head of Treasury Research & Strategy at OCBC.

Ling noted that the services sector’s 1.9% year-on-year growth in the first quarter marked the slowest pace of growth since 3Q09. Even growth in the financial services industry stalled, although this industry has long been seen as the bulwark of the services sector.

“Since we expect 2Q16 to be weaker, this is likely to tip the scales towards a technical recession materializing by 2Q16 or even 3Q16,” she said.

Irvin Seah, senior economist at DBS, noted that the services sector will be less able to prop up overall economic growth and pick up the slack in manufacturing.

He highlighted that on a quarter-on-quarter seasonally-adjusted basis, the services sector contracted by 3.8%, compared to a strong expansion of 7.7% in the preceding period.

Loan growth also remained stuck at a multi-year low of -1.2% for three straight months, reflecting weakness in the financial services cluster. In addition, slowdown in trade flows is also likely to weigh down on transport and trading activities, Seah noted.

“The services sector is losing steam, in line with our expectation. Services accounts for about two-third of the economy. Historically, if this sector turns, the economy turns along with it. A downward revision of the headline GDP growth should not be discounted,” he said.