Growth estimate narrowed; China’s move to devalue yuan may add more pressure

Singapore’s economic outlook took on a more uncertain hue yesterday after the Government trimmed its forecast for growth this year and China moved to weaken its currency to boost its struggling economy.

The Ministry of Trade and Industry (MTI) yesterday highlighted the risks to Singapore’s economy from China’s slowing growth and an uneven global outlook when it narrowed its full-year forecast for growth this year to 2 per cent to 2.5 per cent from its previous estimate of 2 per cent to 4 per cent.

This was followed by China’s shock move to devalue the yuan by 1.9 per cent. With Chinese exports becoming cheaper, this is likely to weigh heavily on Singapore exporters, economists said.

Together with the weaker forecast for Singapore’s growth, the news sent local shares tumbling yesterday, with the benchmark Straits Times Index sagging 43.6 points, or 1.36 per cent, to 3,153.06.

Currencies too were hit, with the Singdollar at one point weakening to as much as $1.40 against the greenback. The Malaysian ringgit and Indonesian rupiah also fell to lows not seen since the Asian financial crisis 17 years ago.

Data showed that a sluggish manufacturing sector dragged second-quarter economic growth down to a level not seen since 2012. The economy grew 1.8 per cent from April to June, the MTI said, significantly lower than the 2.8 per cent growth for the first quarter.

Manufacturing, which shrank 4.9 per cent in the second quarter over the same period a year earlier, was the main drag on growth.

The sector, which makes up a fifth of the economy, was weighed down by declines in the transport engineering and biomedical segments. The strongest performer was the finance and insurance industry, which expanded 7.1 per cent in the second quarter.

The global economy was weaker than expected in the first half of this year, the MTI said yesterday.

While growth is expected to pick up gradually over the rest of the year in advanced economies such as the United States, the outlook for regional economies is less sanguine amid slowing growth in China.

MTI Permanent Secretary Ow Foong Pheng also flagged risks linked to the strengthening greenback and an anticipated hike in US interest rates, which could lead to capital outflows from the region.

IE Singapore narrowed its forecast for non-oil domestic exports to between 1 per cent and 2 per cent, from a previous estimate of 1 per cent to 3 per cent.

Capital Economics’ senior Asia economist Daniel Martin said a sustained recovery in export growth looks unlikely, based on the lacklustre outlook for Singapore’s main trading partners. Some economists say there is a chance the Monetary Authority of Singapore may move to slow the appreciation of the Singdollar when it meets in October, especially if growth weakens further.