SINGAPORE (Reuters) - Singapore’s economy contracted in the second quarter as sluggish global demand and government restrictions on foreign labour knocked the manufacturing sector, raising the prospect of further monetary easing later this year.
The trade-reliant economy’s currency crumbled to a one-month low with at least one analyst warning that the grim data raised the risk of a technical recession.
Gross domestic product shrank 4.6 percent in the second quarter from the previous three months on an annualised and seasonally adjusted basis, pressured by the manufacturing sector contracting 14 percent on quarter, advance estimates from the Ministry of Trade and Industry (MTI) showed on Tuesday.
“We cannot rule out a technical recession,” said Hak Bin Chua, economist at Bank of America-Merrill Lynch, who along with a few other analysts expects the government to downgrade its full-year 2-4 percent growth forecast.
The second quarter slump was in sharp contrast to a revised 4.2 percent expansion clocked in the first quarter and the 0.8 percent growth picked in a Reuters poll.
Some economists said the poor GDP reading could stoke expectations for the Monetary Authority of Singapore to ease its exchange-rate based monetary policy at its October policy review, especially after annual core inflation hit a five-year low of 0.1 percent in May.
“With an already weak inflation backdrop, a little bit of MAS easing expectation may creep back into the market,” said Jonathan Cavenagh, senior FX strategist for Westpac.
The Singapore dollar slumped to a one-month low of to 1.3622 versus the U.S. dollar soon after the GDP report, its lowest level since June 8.
Singapore’s manufacturing sector took the brunt of the downturn in the second quarter, driven by a fall in output in the biomedical and transport engineering clusters.
Erratic global demand led by a slowdown in China - a major market for Singapore - and a years-long government policy restricting foreign workers have hurt private investment and business expansion, analysts say.
Indeed, the services sector also shrank 2.6 percent on-quarter, in a rare contraction for the sector.
“The labour crunch is really inhibiting companies’ ability to grow, their ability to take on new orders,” said Irvin Seah, senior economist for DBS Bank.
Besides the obvious risks from Greece’s debt crisis, weak growth in China and neighbouring Indonesia and Thailand could further undermine the city state’s economy.
Seah sees risks of core inflation turning negative in the next few months.
“That, on top of this poor growth performance, will exert pressure for the MAS to consider further easing in their monetary policy.”
Additional reporting by Saeed Azhar; Editing by Shri Navaratnam