Singapore second-quarter economic growth seen sluggish, keeps Central Bank pressured

Reuters: Singapore’s economy is expected to have grown at a tepid pace in the second quarter and the combination of a strong currency and free-falling consumer prices could force the central bank to ease monetary policy further.

Some analysts also warn of rising recession risks for the small, trade-reliant city state especially after the shock of Britain voting to leave the European Union is expected to hurt global growth on top of stress in China’s economy.

Singapore’s gross domestic product is forecast to have expanded 0.9% in April-June from the first quarter on annualized and seasonally adjusted basis, the median forecast in a Reuters poll of 15 economists showed. That compared with 0.2% growth in January-March.

On a year-on-year basis, the economy is predicted to have grown 2.2%, faster than a 1.8% expansion in the first quarter.

But the pick-up is largely notional as it will be influenced by base effects and there are worries about the outlook.

“Singapore is probably one of the more exposed economies in the region to Brexit not just from a trade perspective but also from a financial market (perspective),” said Nomura economist Brian Tan, penciling the full-2016 growth forecast at 1.1%, at the lower end of the government’s 1-3% expectations.

“We are expecting (the central bank) to ease the FX policy in October. This will probably come in the form of a downward re-centering of the SGD NEER band,” Tan added.

That would be a one-off weakening of the Singapore dollar.

The Monetary Authority of Singapore manages policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).

In April, the central bank eased policy by setting the rate of appreciation of the policy band at zero percent.

The International Monetary Fund last week cut its euro zone growth outlook for the next two years and warned that the conditions could worsen if Brexit related confusion persists. The euro zone is Singapore’s second-largest non-oil domestic exports market after China, where an ongoing slowdown has already taken a toll on the city state.

Recession talk

Signs of a faltering economy are abundant.

Entire floors at central shopping malls are vacant as weak domestic demand has hurt retailers. The majority of bars and restaurants in the Raffles financial area post “hiring” signs on the windows as immigration curbs have exacerbated a labor shortage. Vacancies in office and residential buildings are at multi-year highs.

Even the financial industry is under pressure due to tougher compliance rules amid a money laundering scandal.

Headline consumer prices in May extended an annual decline for a 19th straight month, the longest such streak since Singapore’s independence in 1965.

Singapore’s trade agency International Enterprise Singapore said in May it saw non-oil domestic exports contracting 3.0-5.0% this year, compared with previous expectations of a 0.0-2.0% expansion. The oil and marine industry is also taking a hit from lower commodity prices.

Despite the gloom, the Singapore dollar has remained strong on demand for safe-haven in emerging Asia. Some analysts estimated that the S$NEER was about 0.9% above the mid-point while the upper end of the band was 2.0% above it.

A strong Singapore dollar is likely to put further pressure on both inflation and exports.

“The probability of a recession is now higher, which may prompt the MAS to re-center the mid-point of the SGD NEER band lower,” said RBS economist Vaninder Singh.

Last month, Indonesia, South Korea and Taiwan cut interest rates.