Is Singapore Headed For Recession?

Singapore could face a technical recession in the first half of this year as plunging oil prices and a drop in China’s appetite for imports weigh on the city-state’s economy.

ANZ’s Weiwen Ng

Although it ended 2015 on a high note, expanding 5.7% in the fourth quarter on a seasonally adjusted, annualized basis, Southeast Asia’s once resilient economy is nonetheless in the midst of an ongoing contraction in its crucial manufacturing sector. The service sector buoyed economic performance last year, but recent data shows forward-looking sentiment on that sector declining. According to ANZ Research, Singapore’s economy is already stuck in a trade recession, so the services sector will be pivotal.

“The manufacturing sector is vulnerable to cyclical headwinds and structural factors, such as the US recovery being led by services, and China increasingly engaging in vertical integration in domestic production,” said ANZ economist Weiwen Ng. That means “both the US and China are importing less from this region.”

ANZ says the services sector paints an uncertain picture of “fluid and brittle drivers” consistent with an economy under external and domestic pressure. The wild-card nature of the services sector could lead to a broad recession in the coming months.

Singapore’s strengths, like domination of aspects of the offshore and marine engineering market, are becoming liabilities as oil and gas capital spending declines in major markets due to low oil prices. HSBC estimates that 20% of the manufacturing sector is linked to oil prices. Business cessations exceeded business formations in December.

Despite the downside risk, ANZ is sticking to its forecast of 2.3% GDP growth in 2016. In the case of recession, the Monetary Authority of Singapore, the city-state’s central bank, could ease some of the measures used to cool down the property market. HSBC estimates housing prices have fallen 8% since 2013 but doesn’t think MAS will change policy until they dip 10% to 15%.

Still, with households heavily indebted and the increasing prospect of negative equity, Singapore’s government has a difficult path to tread.