Singaporean economic growth decelerates sharply in Q2 2019, MAS core inflation likely to ease in coming months

Singaporean economic growth slowed down in the second quarter of 2019 from the first quarter. On a year-on-year basis, the economic growth eased to 0.1 percent from prior quarter’s 1.1 percent. Today’s figures were well below expectations.

Not since the global crisis has the Singaporean economy seen such low growth. The manufacturing sector was again the biggest drag on growth, taking 1 percentage point off year-on-year GDP growth in the quarter. The services sector was able to counter the manufacturing’s drag by contributing 1.1 percentage points to year-on-year growth.

Sequentially, all three major sectors of the economy recorded a fall in output in the second quarter. The manufacturing sector shrank 6 percent, the third straight quarter of output decline. This sector is clearly bearing the brunt of the global trade downturn. Construction sector output dropped 7.6 percent, reversing the solid 13.3 percent growth in the previous quarter due to the completion of major construction projects.

Based on the soft performance of the Singaporean economy in the second quarter, and with risks to the outlook for the second half of the year still skewed to the downside, the government’s official GDP growth forecast of 1.5 percent to 2.5 percent for this year is expected to be revised lower, noted ANZ in a research report.

The GDP data released today has significant implications for monetary policy. It is evident that 2019 growth might be below potential, hence the output gap will turn negative. The MAS Core Inflation has been easing since its peak at 1.9 percent year-on-year in December 2018, and is expected to head towards 1 percent in the months ahead. Significantly, the PMI has averaged lower than the neutral 50 level in the second quarter for the first time since 2016.

“We now expect MAS to ease policy at their October review. We see the slope of the S$NEER policy band being reduced slightly to 0.5 percent pa from the current 1.0 percent. While policy easing by MAS should lead to a weaker Singdollar, any weakness will be limited given the US Federal Reserve is also set to cut the fed funds rate. But SGD should underperform the basket currencies as markets start to price in MAS easing, pushing the S$NEER towards the midpoint of the policy band”, added ANZ.