Singapore: A deep recession


Amid the poor showing in the 1Q20 GDP figures, we have also lowered our full year GDP growth forecast to -2.8%, a deep recession of historic proportion.
Irvin Seah26 Mar 2020
  • GDP growth shrunk by 2.2%yoy and 10.6%qoq, saar in 1Q20, based on the advance estimates
  • Amid the poor showing, we have also lowered our full year GDP growth forecast to -2.8%
  • A second stimulus package will be announced to arrest the decline in economic momentum
  • The MAS will likely adopt a more aggressive policy easing stance in the upcoming meeting
Photo credit: AFP Photo


The Singapore economy is projected to contract by 2.2% YoY in 1Q20 based on the advance GDP estimates. This is the worst year-on-year decline since the global financial crisis period. On a QoQ saar basis, the economy shrunk drastically by 10.6%, a magnitude unseen since 3Q10. The construction sector led the decline with a contraction of 4.3% YoY, followed by the services (-3.1%) and the manufacturing (-0.5%) sectors. However, with the services sector accounting for about the two-thirds of GDP and employment, the main drag is still services. If the services sector falls, the economy follows. Even an improvement in the manufacturing sector in the coming quarters will not be enough to offset the drag. This will be a services-led full year recession. And the impact on jobs will be significant. The official GDP forecast for the year has also been lowered to -1% to -4%, down drastically from -0.5% to 1.5% previously.

A very deep recession

Indeed, the latest set of figures has confirmed our fear that a recession is inevitable amid the impact from the Covid-19 outbreak. As death toll continues to rise globally, the scale of the travel restrictions is unprecedented, and the impact will be extremely sharp. Tourism related industries such as hotels and restaurants, aviation, point-to-point transport services, retail and entertainments services are already being severely impacted. Consumer sentiments and investor confidence have taken huge beatings. The financial markets were sent into tailspins, airlines are on life support and shopping malls are largely closed. Global supply chains have also stalled. Small and open economies such as Singapore will be worst hit.

We had earlier lowered our full year GDP growth forecast for 2020 to -0.5% to reflect the recession scenario and have also indicated that this forecast comes with significant downside risks should the outbreak worsen further. Since then, more restrictive measures have been put in place amid sharp spikes in imported cases from returning residents. A ban on short-term visitors will exacerbate the downside in the tourism and aviation industry. Safe distancing measures such as cancellation of public events, closing of nightlife venues, and the deliberate efforts to reduce human traffic flows in eateries and malls will hit the domestic sectors further.

We are revising our full year GDP growth forecast down to -2.8% in light on the recent development locally, as well as factoring in the risks on the global economy. This will be deeper than the recession during the Asian Financial Crisis when the economy contracted by 2.2%. In fact, this could well be the worst recession ever on record for Singapore. GDP growth figures for the next two quarters will likely be even deeper than the first quarter. Declines of more than 3.5% can be expected.

Moreover, the negative headline (YoY) growth could sustain throughout the entire year. Amid such a dire economic outlook, strong policy responses will be required to arrest the fall. A second stimulus package will be announced later today. Expectation is that it will be significantly bigger than the previous package of SGD 6.4bn, and the reserves may be tapped to help fund part of the package. We expect the government to roll out a package of up to SGD 14-16bn (approx. 2.9% of GDP) to further buttress the economy. This would entail utilising the remaining accumulated reserves of about SGD 7.7bn and drawing down an additional SGD 6-8bn from the reserves. If not fully utilised, monies from the reserves could also serve as a contingency fund should a third package become necessary.

Beyond fiscal policy, we also expect the Monetary Authority of Singapore (MAS) to ease the SGD policy next Monday in order to render more support for the economy. Specifically, we expect MAS to 1) end the modest and gradual appreciation path of the SGD NEER policy band, and 2) introduce a downward re-centring of the band by up to 2%.


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Irvin Seah

Economist - Singapore, Malaysia & Vietnam
irvinseah@dbs.com

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