A technical recession seems imminent in Singapore

A technical recession seems imminent in Singapore. GDP growth is expected to fally by a 0.6% QoQ saar (+1.1% YoY) in 3Q15. Given the decline of 4% QoQ saar in the second quarter, this puts the economy squarely in a technical recession. 

The manufacturing sector is in reverse. Amidst the uncertain external environment, industrial activity and export performance have slumped. Manufacturing production shrunk by 7.0% YoY in August, led by a 8.4% plunge in NODX. Hope for the services sector to pick up the slack is fading too. A domestic manpower crunch and heightened risks in the global environment have weighed down on the performance of the sector. 

With a technical recession and full-year inflation expected to be negative, currency appreciation becomes a difficult policy to maintain. Challenges are compounded by potential capital flight that could result from higher US interest rates and / or fears of further yuan devaluation. All things considered, the MAS is expected to ease monetary policy in October. 

The key question now is whether this is the bottom or the start of something bigger. For now, the recession does not appear to be a deep one. But external headwinds have been strong. And although the outlook for the economy still supports the below-consensus GDP growth forecast of 1.8% for 2015 and 2.1% for 2016, downside risks are piling up.