Possible recession in Singapore if US-China talks fail, economists warn

Trade data released by Enterprise Singapore showed a 15.9 per cent year-on-year fall in non-oil domestic exports from Singapore in May 2019 — the sharpest dive since March 2016. — TODAY pic
Trade data released by Enterprise Singapore showed a 15.9 per cent year-on-year fall in non-oil domestic exports from Singapore in May 2019 — the sharpest dive since March 2016. — TODAY pic

SINGAPORE, June 18 — Singapore could enter a recession if trade tensions ratchet up further between America and China, economists warned as the country’s overall and electronic exports recorded one of the worst performances in recent years.

Trade data released by Enterprise Singapore yesterday showed a 15.9 per cent year-on-year fall in non-oil domestic exports from Singapore in May — the sharpest dive since March 2016. This was the third consecutive month of decline, as exports shrank 11.8 per cent in March and 10 per cent in April.

Exports to China, Taiwan and Hong Kong contributed the most to May’s decline, shrinking by 23.3 per cent, 34.7 per cent and 24.8 per cent respectively, the trade agency said in a statement.

But there were some bright spots in the trade data, with the pharmaceutical sector helping to offset the decline, growing by 28.5 per cent year-on-year in May, economists told TODAY.

Enterprise Singapore attributed May’s poor showing to the comparison with a high base in May 2018. That month featured a surprise boost in the pharmaceutical industry that was hard to top, economists said.

However, this was only a partial reason for the significant decline, they said. The recessionary risks have gone up for Singapore, especially if trade talks break down between United States President Donald Trump and China President Xi Jinping at the upcoming Group of 20 (G20) meeting in Osaka, Japan.

Trump has threatened to impose tariffs on another US$325 billion (S$445 billion or RM1.35 trillion) of Chinese imports, and has issued export bans against Chinese tech companies such as Huawei.

Song Seng Wun, an economist with CIMB Private Banking, said that the state of Singapore’s economy would depend on whether the two leaders are able to reach a positive outcome. “If the full tariffs materialise, there will be a larger risk of recession in 2020 in Singapore.” 

If that happens, the next phase would depend on the timing of the tariffs, Song added.

A delay could lead to some frontloading activities — in which American and Chinese companies stock up on parts and supplies before the tariffs take effect — and this could benefit Singapore for a short while. But if the tariffs happen right away, Singapore could feel the impact “almost immediately”, Song said.

Economists said that the Singapore economy is highly susceptible to trade risks, given its comparatively small size to other economies and its significant trade openness. Last year, around S$1.1 trillion worth of goods passed in and out of the country, making up around 220 per cent of Singapore’s total growth that year — higher than most economies.

Last month, Singapore downgraded its 2019 economic growth forecast to 1.5 to 2.5 per cent, following the poorest growth in a decade for the first quarter, amid the worsening bite of the trade war on the manufacturing industry.

Economists Chua Hak Bin and Lee Ju Ye with Maybank Kim Eng agreed that a full-blown trade war, marked by the full imposition of tariffs on US$575 billion worth of Chinese imports into the US, could see Singapore slip into a recession.

They said: “Today’s trade numbers continued to underscore the fragility of Singapore’s export growth this year. With the broadening of the US-China trade war to a tech war, Singapore may face increasing pressure and (suffer) collateral damage given the widening reach of US export controls on emerging and foundational technologies.”

Electronics industry held hostage

Notably, electronics exports shrank by 31.4 per cent in May compared with the same period last year. This was the worst on record since 2009, economists told TODAY.

With Singapore’s electronics industry “held hostage by the escalation of the trade war into a tech war”, Song said that Singaporean electronics manufacturers are unlikely to experience any respite since many of them supply parts and finished products to China.

In May, Singapore exported 81.4 per cent fewer non-monetary gold, 33.8 per cent less integrated circuits and 27.3 per cent fewer specialised machinery to China, Enterprise Singapore reported.

Song said: “(Even without the trade war), the bad news is that we are on a mature growth cycle, so new orders of parts and equipment can only continue to slow. If we continue to see this as we head towards the festive period at the end of the year, it will be problematic for Singapore.”

Senior economist Irvin Seah with DBS bank said that “it should not come as a surprise” that the risk of recession will increase if the G20 talks fail. However, he added that the situation between the US and China is “still very fluid”.

Economist Barnabas Gan from United Overseas Bank (UOB) agreed: “Singapore’s export outlook remains underpinned by headline news surrounding the US-China trade negotiations.” Gan added that potential resolution during the trade negotiations could spell some upsides for Singapore and Asia in the year ahead.

But the worsening trade relationship, which coincides with a softening of China’s economic growth momentum, has led UOB to downgrade its non-oil domestic exports 2019 forecast to come in between -1 and -3 per cent, from -1 per cent previously, Gan said.

Economist Howie Lee with OCBC bank said that his bank has downgraded its full-year exports forecast from -2.2 per cent to -2.6 per cent, adding that the lacklustre electronics sector will likely be the biggest drag on exports.

While Singapore’s political leaders, most recently Prime Minister Lee Hsien Loong, have opined that it will take a long time for the trade tensions to be resolved, some experts said that how the conflict pans out is still up in the air.

Seah said: “It is always hard to make a call on what Donald Trump will do. But it is a protracted process and businesses have already made preparations.”

He noted recent reports on how some Singaporean companies exposed to the trade conflict have already frozen manpower headcounts or are changing their hiring patterns.

Retrenchments have grown in the first quarter of this year, primarily in the manufacturing industry, a labour market report put out by the Manpower Ministry last week said.

Around 18 per cent of retrenched workers had been from the electronics sector, which was the hardest-hit sector followed by services sectors such as wholesale trade, transportation and storage.

The ministry’s report signalled the start of a weakening cycle in the labour market, Seah noted. Song said that these sectors which experienced the most retrenchments had depended on the health of the external environment, which is now facing global trade headwinds.

Eonomist Tan Khay Boon, senior lecturer at SIM Global Education, said that for now, most market watchers are still predicting slower growth than full-blown recession.

“But if the trade dispute results in significant tit-for-tat tariff or trade restrictions which further reduce export demand, a recession cannot be ruled out eventually,” he said. — TODAY