Singapore is in danger of entering recession in the third quarter, in what could be a sign of a wider, deeper slow down all over Asia.
A recession is defined as two consecutive quarters of quarter-on-quarter contraction.
In Q2, Singapore’s GDP fell 4.6% from Q1, and recent trade data suggests it could contract again in the third quarter.
That spells bad news for the rest of the region.
That is because during Asia’s last two major recessions — the 2001 tech recession and the 2008 financial crisis — Singapore was one of the first and/or few Asian nations to hit a wall, according to Bank of America Merrill Lynch.
The country usually starts to slow down considerably one to two quarters earlier than its neighbours.
“During the global financial crisis, after Singapore slipped into a recession in 3Q 2008, Malaysia, India, Thailand and the Philippines all followed suit and slipped into recession one to two quarters later,” BAML said in a recent note.
“Indonesia and Korea saw one quarter of negative quarter-on-quarter growth. China’s growth moderated but did not contract.”
Why this canary in that cold mine?
Singapore is vulnerable because it’s small, and its total trade is over three times GDP. BAML says that makes it a “useful recession barometer.” It is sensitive to its neighbour’s demand (or lack thereof).
See, a demand crisis is what we’re worried about in Asia. With China slowing down significantly, the worry is that countries that have been providing it with raw materials or manufactured goods will start to feel its absence.
Singapore’s August trade numbers reflect that. Non oil exports (NODX) fell 8.4% on a year-over-year basis. The government cited a contraction in Taiwan, South Korea and China as the main reason for its decline.
A reliance on trade is one huge reason Singapore is a barometer. Another is that Singapore releases its flash GDP number before any of its neighbours.
Its next release is during the second week of October. BAML expects GDP to grow 1% on a year-over-year basis, but to contract 0.9% from August to September.
Digging into that GDP number
Once we have the fresh GDP number, there’s more we can learn about Asia — specifically China, where numbers tend to be more opaque.
Back in July, LMM’s Bill Miller told an audience in New York City that if you don’t trust the growth numbers coming out of China, the best way to understand the world’s 2nd largest economy is to look at Singapore.
“Singapore’s numbers you can trust,” he said. “That’s a good sense of how much the Chinese economy has slowed down.”
The key is manufacturing. When Miller made those comments in July, manufacturing in the country had slowed down 4% from the same time a year before.
In August things got worse.
“On a year-on-year basis, manufacturing output declined 7.0% in August 2015,” Singapore’s government wrote in its data release.
“Excluding biomedical manufacturing, output fell 8.1%. On a three-month moving average basis, manufacturing output contracted 5.7% in August 2015, compared to a year ago. On a seasonally adjusted month-on-month basis, manufacturing output decreased 3.7% in August 2015 compared to July 2015.”
So are you ready for the reveal?