Singapore: Recession looms

Singapore’s recent activity indicators continue to reinforce a weak backdrop for the economy that’s bracing for a beating as Covid-19 goes global. Trade and tourism are the sectors most affected, as they are largely dependent on strong demand from China.

Retail sales for January contracted by 5.3% year-on-year - the steepest fall in almost a year following December’s 3.4% fall. As expected, weak automobile sales were the main drag, posting a 34% YoY plunge on top of the 24% fall in December. Sales ex-autos just about scraped 0.6% growth.

The yearly fall may have been inflated by the Lunar New Year holiday, which last year was in February. As a result, we anticipate a much bigger plunge in sales as the epidemic spreads, which will not only dent tourist spending but also weigh down domestic consumer shopping.

Among other things, rising unemployment is also depressing consumption.

January non-oil domestic exports and industrial production were a mixed bag as the former continued to fall and yet the latter rose. But, like retail sales, these were distorted by the new year holiday and are likely to dip further in February and the months ahead.

Manufacturing purchasing managers index is foreshadowing a clear oncoming trend, as it dipped to 48.7 in February from 50.3 in the previous month - a big single-month fall in over five years while the electronics sector PMI fell to 47.6 from 50.1.

The headline index is correlated with year-on-year GDP growth, not a perfect fit though fairly close as the chart below shows. And, it’s pointing to steady downward grind in GDP growth, more likely into the negative territory.

In light of the evolving Covid-19 situation, especially the rapid spread of the epidemic beyond Asia, Singapore’s small open economy is among the most vulnerable. Having grown by only 0.7% in 2019, negative GDP growth doesn't look too far-fetched.

Consistent with initial indications from the PMI data, we think a couple of quarters of GDP contraction, both on a yearly and quarterly basis, now look inevitable. Accordingly, we see -0.3% YoY and -0.5% GDP fall in the first and second quarters respectively, both also implying a quarterly contraction tantamount to a technical recession.