Singapore faces high risk of slipping into a technical recession in the second quarter


26th May 2023 – (Singapore) Singapore faces a high risk of slipping into a technical recession in the second quarter, according to private-sector economists. Challenges in the external environment persist, and the economy declined by 0.4% in the first quarter on a quarter-on-quarter seasonally adjusted basis. This marks a reversal from the 0.1% growth in the fourth quarter of 2022, leaving the economy at risk of a technical recession, which is defined as two consecutive quarter-on-quarter contractions.

The last time Singapore entered a technical recession was in the second quarter of 2020 when the COVID-19 pandemic cooled global growth. Domestically, the roll-out of the “circuit breaker” halted almost all economic activities for two months. On a year-on-year basis, the economy remains in positive territory with growth of 0.4% year-on-year between January and March, albeit much lower than the 2.1% growth seen in the previous quarter.

Singapore’s small and open economy relies heavily on trade, but external demand has been weakening amid a slowdown in the global economy, still-strong inflationary pressures, and a downturn in the global semiconductor industry. The country’s key non-oil domestic exports (NODX) have since chalked up a seven-month losing streak. Authorities on Thursday also downgraded the 2023 forecasts for NODX following a “worse-than-expected” performance in the first quarter.

“Although it is not our base case scenario, there remainsa high risk that the economy slips into a technical recession, either in the second quarter or in the second half of the year,” said Mr Shivaan Tandon from Capital Economics. “While advanced economies have held up better than initially expected, we expect that resilience to fade in the second half of the year, which will weigh heavily on demand for Singapore’s exports,” he added.

Maybank economists Chua Hak Bin and Lee Ju Ye believe that the weaker performance in external-oriented sectors, such as manufacturing, is likely to offset the resilience in other parts of the economy like tourism, resulting in the economy stagnating instead of staging a rebound in the coming quarters. They added that Singapore may slip into a technical recession “if the boost from China’s reopening fails to materialise in the second quarter”.

On the tourism front, the return of China tourists “has been more a trickle than a flood,” the economists wrote in a note. Meanwhile, exports have yet to feel a boost, with NODX shipments to China contracting sharply in April. “(This suggests) limited boost to China import demand from the reopening,” the economists added.

Domestically, falling inflation will provide some relief for households, but nominal wage growth and employment could be in for “a sharp slowdown” in the near term, said Mr Tandon. Alongside higher debt servicing costs due to the rise in interest rates, these will dampen consumer spending in the coming quarters and keep a lid on consumption activity.

Some economists, however, are more optimistic. DBS economist Chua Han Teng does not expect a technical recession and is predicting a turnaround in the economy in the second half of 2023 to take full-year growth to 2.2%.

Policymakers said on Thursday that they are not expecting a technical recession this year. Ms Yong Yik Wei, chief economist at the Ministry of Trade and Industry, said quarter-on-quarter growth is expected to be “fairly flattish or very low” in the first half of the year, but should pick up gradually later in the year. “Given the downside risks and the weakening outlook, we cannot rule out the possibility that there could be some quarters of negative quarter-on-quarter growth this year, but again, that’s not our baseline,” she told reporters at a press conference.

The Singaporean government has maintained its forecast for gross domestic product (GDP) growth to range between 0.5% and 2.5%, with the actual expansion likely to “come in at around the mid-point” of this range.