This is what technical recession really means for Singapore

Should Singaporeans fear the R-word?

The dreaded R-word has been thrown around a lot in Singapore, as the city-state continues to grapple with the triple threat of disinflation, weak external demand and domestic restructuring crunch. Although economic growth is expected to be significantly more muted this year, analysts believe that Singapore is not headed for a severe slowdown reminiscent of the 2008/09 global financial crisis.

“Although the risk of a technical recession in 3Q 2015 is much higher after the IP data release, we are not factoring a severe economic recession, in the scale of the 2008/09 global financial crisis where unemployment shot up to 3.3% during the depth of the crisis in 3Q 2009 from just 1.7% in 4Q 2007,” said Francis Tan, economist at UOB.

Unemployment in the city state remained extremely low in Q2, with overall unemployment rate hovering at 2% in June 2015.

UOB expects Q3 GDP to grow only 1.1% year-on-year, representing a contraction of 0.4% quarter-on-quarter. This will satisfy the conditions of technical recession but does not mean that growth will be non-existent this year.

For instance, Bank of America Merrill Lynch believes that full year 2015 GDP growth will register at 1.6%, the slowest since 2009 and below the lower range of the government’s forecast of 2.0% to 2.5%.

“We think the question should be shifting to whether this is a shallow or deep recession. Our sense is that the third quarter may not yet be the worst quarter. We see services growth continuing to moderate in the third quarter. The nation’s Jubilee 50th birthday celebrations may have provided a small boost, but is unlikely to fully offset the manufacturing weakness,” said BofAML economist Hak Bin Chua.

With Singapore almost surely headed for technical recession, both Tan and Chua expect that the Monetary Authority of Singapore (MAS) will ease policy to accommodate softer economic conditions.

“We expect the MAS to ease at the October policy meeting (date yet to be announced), in response to the probable recession and absence of inflationary pressures. Inflation is coming in at the low end of expectations. We expect the MAS to shift its current weak appreciation bias to a neutral (zero) bias and possibly re-centering the S$NEER band downwards,” Chua said.

“Conditions currently may not warrant any further SGD NEER slope flattening, but with the on-going EM currency depreciation trend, the change in MAS’ core inflation outlook, and the SGD NEER consistently trading at the weaker portion of the band since 31 Jul 2015, we are convinced that the MAS may execute a one-off downward shift in the SGD NEER midpoint by 1%,” Tan noted.