SINGAPORE (June 10): Singapore is at risk of a recession if the trade war escalates,” Chua Hak Bin, senior economist at Maybank Kim Eng, tells The Edge Singapore. His comment comes amid rising global economic uncertainty and its resultant effects on the city state’s economy.
Singapore’s economy grew 1.2% in 1Q2019 following a contraction in manufacturing amid global trade tensions and an electronics slowdown. This is the slowest quarterly growth in nearly a decade and is lower than the 1.3% flash figure forecast by the Ministry of Trade and Industry (MTI) and the 1.4% expansion forecast by analysts polled by Bloomberg. The last quarter with such a small expansion was 2Q2009, during which GDP shrank 1.2% y-o-y.
The MTI has responded to this contraction by adjusting its full-year growth forecast downwards to 1.5% to 2.5%; its initial forecast was between 1.5% and 3.5%. The revision was done after “taking into account the performance of the Singapore economy in the first quarter, as well as the weaker external demand outlook”, the MTI said in its Economic Survey of Singapore, released on May 21.
The escalating tensions between economic powerhouses the US and China have had dire implications on countries all over the world. These include a reduction in business confidence and investment. China’s manufacturing purchasing managers’ index (PMI) dipped 0.7ppt to 49.4 in May, raising concerns of weaker domestic demand, especially for investment, despite the introduction of supportive measures. “Trade and technology tensions with the US would not only affect external demand but would also undermine business sentiment,” notes Citi in a recent report.
The yield curve’s inversion in the US at end-May — where three-month Treasury yields are higher than 10-year Treasury yields — is weighing on sentiment. Inversions of the 10-year/three-month curve have preceded the past seven recessions. Add to that the additional tariffs by US President Donald Trump. On the weekend of May 11 and 12, Trump tweeted plans to impose 25% tariffs on Chinese goods amounting to US$325 billion ($448 billion).
There have been tariffs on US$200 billion of Chinese goods so far. Trump says he will send the earnings from the tariffs to “poor and starving countries for humanitarian assistance”.
The tariffs appear to be causing a slowdown in global growth, in contrast to the synchronised expansion in the global economy in 2018. In turn, slowing activity in China, brought on by tightening domestic financial conditions, has spilled over to other Asian economies, including Asean, via weaker trade flows. Waning frontloading activity by US importers of Chinese goods exacerbated the slowdown in Asia’s exports.
Singapore’s small export-oriented economy at risk
The trade war has also hit factory activity in Singapore with the PMI dipping to 49.9 in May, down 0.4 points from the prior month. The data released by the Singapore Institute of Purchasing and Materials Management on June 3 points to a contraction of the manufacturing sector after 2.5 years. This comes on slower growth in new orders, new exports, factory output and inventory.
With exports accounting for 173.3% of GDP in 2017, Singapore’s economy has always been export-oriented. The relatively small size of the domestic economy has necessitated a need for the export sector to drive the overall economy. The city state thus developed a comparative advantage in producing high-end value-added intermediate, capital goods.
However, this sector has been hit substantially in the last year. Non-oil domestic exports (NODX) decreased 10% y-o-y in April 2019 following declines in both electronic and non-electronic exports. While this is an improvement from the 11.8% y-o-y decline recorded in March, it reflects a continuation in the fall in exports. Overall, NODX extended its quarterly decline in the first quarter, posting a 6.4% y-o-y drop. This is significantly sharper than the 1.1% drop recorded in the final quarter of last year. The latest fall prompted trade promotion agency Enterprise Singapore to revise downwards the projected NODX performance for the full year from the initial 0% to 2% growth to -2% to 0% growth.
It has, however, maintained its total trade forecast growth at 0% to 2% as it continued to expand in the first quarter, albeit declining 9.2% from the previous quarter.
Data from the Department of Statistics shows that Singapore’s top four trading partners in 2018 were China, Europe, Malaysia and the US. Trade volumes stood at $135 billion with China, $114.7 billion with Europe, $118.3 billion with Malaysia and $97.9 billion with the US. Based on NODX figures from April 2019, NODX to these nations were down substantially. NODX to China dropped 5.8%, to Europe, 25.4% and to Malaysia, 13.6%. NODX to the US grew 2.2%.
Exports to emerging markets — which previously helped propel overall growth — saw a 13.3% decline. This is likely because these markets too have been badly hit by the repercussions of the trade war.
As the cliché goes, when the US sneezes, the world catches a cold. The tariffs imposed by Trump to protect American businesses from Chinese exports have a lasting impact on global supply chains. Global economies may experience a period of slower growth as they adjust to these changes.
Trade diversion by the US may be growth opportunity
Eventually, Southeast Asian countries could gain from a possible trade diversion by the US. American companies have been manufacturing their goods in China, owing to the lower cost of labour and production. The rising friction between the superpowers may see the US turning towards Asean as a viable alternative.
A report released by PwC in conjunction with the region’s 50th anniversary showed that the GDP of Asean as a group has more than quadrupled from US$577 billion in 1999 to US$2.55 trillion in 2016, making it the world’s sixth-largest economy. It has also been identified as the region with the most economic potential.
The US has long been a key trading partner for Asean. US exports to the region stood at US$86.2 million in 2018, up 10.6% from the US$8.2 billion recorded in 2017. It accounts for some 5% of overall US exports in 2018. This is nearly 30% higher than the figure recorded in 2008 — an indication of deepening trade ties. The top five US export markets in Asean last year were Singapore (US$33.1 billion), Malaysia (US$12.9 billion), Thailand (US$12.6 billion), Vietnam (US$9.7 billion) and the Philippines (US$8.7 billion).
Following the trade war, economists have noticed increased trade between the US and Vietnam — with exports from the latter to the former growing some 30% in 2018. Euben Paracuelles, chief Asean economist at Nomura, says that Asean nations, namely Vietnam, the Philippines, Malaysia and Thailand, stand to gain the most from this trade diversion out of China, given that their comparative advantage lies in products affected by tariffs, strategic geographic location and existing trade linkages. This is likely to boost the GDP of these countries and the region as a whole.
Paracuelles says Singapore will not be a direct beneficiary of this trade diversion — given the maturity of its economy — but can benefit from the increased growth opportunities the countries can provide once they become more developed. He adds that the countries will not pose a threat to Singapore as they are at a different development level. “Singapore is at the forefront of financial technologies and other disruptive sectors. These countries are just thinking about these areas; so there is no competition”, he says.
Paracuelles adds that current intra-Asean trade stands at 20% to 25% of the region’s overall trade, less than half of the trade within the European Union. “There is a need for Asean countries to trade more with each other. The trade diversion can facilitate that.”
Developing new frontiers
Paracuelles says developing the start-ups and small and medium-sized enterprises scene will help Singapore’s economy tide itself over this tough period. They are developing with the aid of fiscal incentives, but more can be done for this sector, he observes.
This will strengthen the domestic economy and ensure that the labour force is more competitive and productive. Figures by the Manpower Ministry for the first quarter show that the labour market was holding up despite the headwinds facing Singapore. Total employment, excluding foreign domestic workers, grew 12,000 y-o-y, albeit less than the 14,700 growth recorded in the previous quarter. It was supported by the services sector such as community, social and personal services, administrative and support services, professional services, financial services, and transport and storage services. Employment in the construction sector increased slightly after 11 consecutive quarters of decline, while the manufacturing sector continued to shed workers.
Additionally, Singapore can also leverage its position as the most competitive country worldwide to portray its economy as a viable location for investment.
It was awarded this honour recently when it topped the IMD World Economic Rankings — an annual world competitiveness ranking of 63 economies — beating the US and Hong Kong. This comes on the back of the country’s advanced technological infrastructure, availability of skilled labour, immigration laws and the ease of setting up new businesses. Hong Kong was ranked No 2. This ranking aside, Singapore has long been an investment choice for MNCs, with several heavyweights such as Facebook and Google setting up their Asia-Pacific headquarters here.
Globally, the dark clouds are on the horizon. Chua warns that the trade war is fast turning into a technology war. Along with the recent US ban on phones by Chinese company Huawei Technologies, Chua envisions that US export control measures may broaden to other technologies beyond 5G, rendering products obsolete and worsening the disruption to tech supply chains.
Economists The Edge Singapore spoke to expect Singapore’s growth to fall within MTI’s forecast, with Paracuelles expecting it to grow 2% and Chua expecting a 1.6% growth, with downside risks. Additionally, a report released on June 4 by the Institute of Chartered Accountants in England and Wales expects Singapore to experience the sharpest economic slowdown in Southeast Asia with a growth of 1.9%. This is in tandem with its forecast that economic growth in Asean will slow from 5.3% in 2018 to 4.8% this year, before moderating to 4.7% next year.
There is a greater need for Singapore to develop its comparative advantage in existing areas and seek out new ones. It must also strengthen its trade dynamics with other countries to leverage possible growth opportunities.
