DBS says Singapore recession 'inevitable'; expects 2nd stimulus package of $14-16 billion

SINGAPORE – A recession in Singapore appears “inevitable”, said DBS Bank as it now sees the economy shrinking by 0.5 per cent this year, instead of the 0.9 per cent growth it forecast last month.

This downgraded forecast still comes with significant downside risks should the coronavirus outbreak worsen further, DBS Bank economist Irvin Seah said in a research note on Thursday (March 19).

He also expects total retrenchments for the year to reach about 24,500, slightly above the 23,430 in 2009 during the Global Financial Crisis.

“Considering the chaotic situation in many parts of the world and the economic costs of those restrictive measures on trade, investment, consumption and travel, this is evolving into a ‘self-induced’ global recession. Being a small and open economy, Singapore will not be spared,” he said.

Mr Seah said a second stimulus package of up to $14 billion to $16 billion could be rolled out, funded by the remaining Budget surplus for this term of Government of about $7.7 billion and an additional $6 billion to $8 billion from the reserves.

A $4 billion Stabilisation and Support Package was announced during the Budget statement last month (Feb).

He also expects the Monetary Authority of Singapore to take a more aggressive monetary response amid falling inflation and the significant downside risk to growth.

“Specifically, we expect MAS to end the modest and gradual appreciation path of the SGD NEER (nominal effective exchange rate) policy band, and introduce a downward re-centring of the band by up to 2 per cent. In fact, an announcement before the next scheduled policy meeting around mid-April should not come as a surprise given the urgency of the matter,” he said.

Mr Seah said that e expects year-on-year contractions of up to 2 percentage points for the first two quarters of the year – which would be a technical recession – and negative growth in the third quarter before an improvement at the end of the year.

He noted that this comes after the bank revised Singapore’s GDP growth forecast down to 0.9 per cent on Feb 7. But back then, the Covid-19 outbreak was still largely contained within China, with only pockets of infection elsewhere.

The situation has deteriorated sharply since then, with the number of infections in other parts of the world multiplying by more than 400 times, he said.

Also, travel restrictions imposed by Singapore have been broadened beyond China to cover markets accounting for about 69 per cent of Singapore’s total tourist arrivals last year (2019), he said.

These include South Korea, Britain, Japan, France and Asean countries.

As such, the services sector – particular tourism-related industries such as hotels and restaurants, aviation, point-to-point transport services, retail and entertainments services will be severely impacted.

A sharp contraction in global demand would also put a dent on the near-term prospects for Singapore’s exports and the manufacturing sector, said Mr Seah, adding that global economic activity will slow significantly as governments around the world have introduced city- and country-wide lockdowns and border closures, and companies have put in place business continuity plans.

He said that Singapore’s downturn this year will be a lot deeper than that during the severe acute respiratory syndrome outbreak in 2003, and more painful than the Global Financial Crisis in 2009.

In these two downturns, Singapore still managed to post GDP growth of 4.5 per cent and 0.1 per cent respectively, he said.

He noted that the previous occasions when Singapore saw full year contractions were during the Dot.com Bust in 2001 (-1.1 per cent), the Asian Financial Crisis in 1999 (-2.2 per cent) and the manufacturing recession in 1985 (-0.6 per cent).

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