Technical recession almost inevitable after dismal manufacturing numbers

Services figures don’t look too good either.

Singapore is at greater risk of dipping into technical recession after churning out persistently weak manufacturing figures in July.

The city-state’s headline industrial production number contracted by 6.1% in July, worse than market expectations and down further from -4.0% in June.

Analysts warn that the poor statistics plainly show that the twin engines of Singapore’s manufacturing sector—electronics and pharmaceuticals—have crumbled on back of weak demand and intensifying external headwinds.

“[The] odds of a technical recession are rising against the backdrop of a worsening global outlook,” said Irvin Seah, economist at DBS. “The economy is on thin ice with poor July manufacturing figures. The poor IP outcome will no doubt raise the likelihood of a technical recession, [or] two consecutive quarters of sequential decline.”

Hak Bin Chua, economist at Bank of America Merrill Lynch, noted that the gloomy manufacturing number are not expected to rebound significantly in August.

“We now think that the odds are more than even that the Singapore economy slipped into a technical recession in the third quarter, as defined by two consecutive quarter-on-quarter contractions. We doubt August IP will recover significantly, especially given recent weak China PMI and market conditions. Both the recent Singapore PMI and Electronics PMI also reverted to below 50 in August,” he noted.

But the equation isn’t quite complete for a full-blown technical recession. Seah said that the ball is now in the services sector’s court, as this segment accounts for two-thirds of the economy.

“Historical trends show that the economy moves along with the services sector. Whether the economy eventually dips into a technical recession depends not only on the manufacturing sector. In fact, it is the services sector that is the crux of the issue. On that, it doesn’t look good. The sector has already contracted by 1.1% QoQ saar in 2Q15. This sector has only ever dipped into contraction in times of recession,” Seah noted.

Singapore’s GDP contracted by 4% quarter-on-quarter in Q2. Growth forecasts have been recently narrowed to 2%-2.5% from the original 2%-4%.

“A technical recession will mean that GDP growth probably fell below that revised range, probably around 1% - 1.5% for the full year. Our GDP growth currently stands at 2% in 2015 and 2.2% in 2016, with risks on the downside,” Chua said.