While the US-China trade war truce achieved at the G20 summit has been widely welcomed by business and markets, trade-reliant regional countries like Singapore are still bracing for economic headwinds.
Economists have warned that Singapore could tip towards recession if the US imposes more tariffs on Chinese imports, a reflection of the wealthy city-state’s high exposure to China-linked supply chains and production networks.
While US President Donald Trump has stepped back, for now, from his threat to slap levies on some US$300 billion worth of additional Chinese goods, US tariffs applied so far have contributed to Singapore’s worst manufacturing downturn in a decade.
The high-tech manufacturing hub’s electronics exports tumbled 31.4% year on year in May as the impact of US tariffs coursed through regional supply chains. Trade data released last month by Enterprise Singapore, a government agency, showed non-oil exports fell 15.9% in May, down from 11.8% in March and 10% in April.
Falling exports to China, Taiwan and Hong Kong were the largest contributing factor to the three-month consecutive decline, according to the agency’s data. Even with a pause on the further ratcheting of US tariffs, economists say Singapore could still slip into recession, defined as two consecutive quarters of negative quarter-on-quarter growth.
“The downside risk probably has eased after [the G20 summit] but uncertainties and weak global demand could continue to weigh on the economy. A recession is not a given yet but the risk remains,” Irvin Seah, senior economist with DBS Bank in Singapore, told Asia Times.
“Electronics was already on a down-cycle before the trade tension escalated. The trade war added salt to the wound for the sector. An easing of the trade tensions may help provide some respite, but the broader industry cycle is still not showing any clear sign of an improvement,” he added.
Singapore’s economic authorities confirm such downside risks.
“The Singapore economy is in for a rougher ride,” said Monetary Authority of Singapore (MAS) chief Ravi Menon on June 27 in a speech that accompanied the release of the central bank’s annual report on economic conditions.
The report notes economic growth in the second half of 2019 is likely to be weaker than earlier envisaged due to a global slowdown caused in part by US-China trade tensions and their ripple effects.
Menon said that global manufacturing is in a “synchronized downturn” and that the decline in manufacturing momentum hasn’t just affected Singapore, citing recent purchasing manager index (PMI) and exports data that show contracting output elsewhere in Asia, including in trade-reliant Japan, Malaysia, Taiwan and South Korea.
A stall in global manufacturing, trade volumes, and investments – cited by Menon as the “three engines” of global growth – has forced Singapore’s government and central bank to review their 2019 growth projection range of 1.5% to 2.5%, which was previously narrowed in May from an earlier 1.5% to 3.5% forecast.
Singapore’s gross domestic product (GDP) grew by 3.1% in 2018, down from 3.7% the previous year.
Menon said it was “too early” to determine how the city-state’s export-dependent economy would fare in 2019, but noted that companies were holding back on their capital-expenditure plans amid the uncertainty.
A business survey published last week by the American Chamber of Commerce in Singapore showed 49% of 144 respondents had been negatively affected by the ongoing trade dispute in the last six months, with 54% of respondents saying planned investments in Singapore and across the region have been delayed or cancelled, up from 49% in late 2018.
Twenty-eight percent of respondents said they were considering moving operations out of China, up from 15% last year. American firms accounted for 61% of the survey’s respondents, with around 90% maintaining operations either globally, across the Asia-Pacific, or in Southeast Asia.
Twenty-two percent of the survey’s respondents are involved in manufacturing.
Those bearish views are impacting adversely on Singapore’s top industries. Retrenchments in Singapore rose 40% in the first quarter of this year, with around 18% occurring in the semiconductor-reliant electronics industry, the city-state’s hardest-hit sector and a major driver of economic growth, accounting for over a quarter of GDP in 2017.
“The manufacturing sector may not bounce back quickly,” said Tan Khay Boon, an associate faculty in economics at the Singapore University of Social Sciences (SUSS). “It is more likely to show a smaller decline or a gradual pick up,” he said, adding that his medium-term outlook was “pessimistic” in view of US-China trade war uncertainties.
“Uncertainties in the external environment are bound to have a negative impact on Singapore’s economy,” the academic told Asia Times, further stating that the manufacturing downturn, anxieties over Britain’s departure from the European Union and potential oil price volatility “add on to the woes of the manufacturing sector.”
Alicia Garcia Herrero, chief economist for the Asia Pacific at Natixis investment bank, shares that pessimistic view. “I think the [post-G20] outlook does not change much. It is just a truce. More tariffs can be added eventually and none have been lifted. This, in itself, is a downward factor if markets were assessing the situation fairly. Nothing has really changed,” she said.
“Singapore will continue to suffer from lackluster trade. The reshuffling of the value chain towards ASEAN should, however, help down the road,” Herrero said in reference to the Association of Southeast Asian Nations regional grouping, whose ten members have been affected by the trade war in different ways.
Vietnam is widely viewed as a third-party beneficiary of the trade dispute, with recent data showing it gained orders from trade diversion on tariffed goods equal to 7.9% of GDP in the first quarter of this year, buoying its status as a low-cost alternative for businesses to shift production.
On the other end of the spectrum, Singapore has been one of the region’s hardest hit economies.
Prime Minister Lee Hsien Loong said in a recent media interview that the consequences of long-term trade tensions can be “even more serious” than the fallout from the 2007-8 global financial crisis, leading to “a bifurcation of technology, of markets, of trust” which could last many decades.
While Singaporean officials have acknowledged worries over contracting growth, they have also played up the island-state’s resilience and strong economic fundamentals.
MAS’ annual report, for instance, highlights its “appropriate” monetary policy stance in the face of weakening growth while pointing to healthy private consumption and services in major global economies as buffers to the trade war’s downsides.
While Singapore’s trade-related sectors will continue to feel the pinch, MAS projects that financial, information and communications, and professional services will be the main drivers of Singapore’s growth in 2019.
“So long as the domestic sector is still dynamic to support a strong demand for service, growth can still occur and recession is not in sight yet,” Tan said.