Singapore as the canary in the mine of the global economy?
David Skilling
17 July 2019
Singapore produced an unexpectedly bad Q2 GDP growth advance estimate last week (0.1% for the year, -0.9% for the quarter). And this morning, Singapore’s non-oil domestic exports (NODX) growth was estimated at -17.3% for the year to June. On several measures, Singapore’s trade and economic data are about the weakest seen since the global financial crisis.
One interpretation of this is that Singapore is the canary in the mine of the global economy, and that this weak data is a deeply negative signal on the regional and global economic outlook. The argument is that these ugly Singapore numbers are an advance indicator of the combined impact of trade wars, a slowing global economy, and various other global headwinds.
It certainly is the case that Singapore, as one of the most open economies in the world (total exports at 175% of GDP, domestic exports (including services exports) at 86% of GDP, and inward FDI at 410% of GDP), is deeply exposed to the strength of the global economy. There is a tight mapping between variation in world trade growth, and other measures of globalisation, and Singapore’s economic outcomes.
However, there are a range of specific factors that bear on the Singapore data. For example, Singapore’s export growth was dragged down by Singapore’s high exposure to the electronics sector (exports down 32%), where the global cycle is turning. In terms of GDP, growth was also constrained by weak/negative growth in the construction sector and several elements of the domestic services sector – which are not directly linked to the global economy. And the government has been running relatively conservative macro policy relative to many of its peers – it has fiscal space to provide meaningful stimulus to the economy; and the MAS has not yet eased monetary policy in the way that many other economies have.
Care needs to be taken in generalising from a specific observation. No single economy or indicator can consistently be seen as a leading indicator for the global economy. Every individual indicator will be impacted by idiosyncratic factors: the Baltic Dry Index was a preferred measure of the global economy for a while, as were semiconductor sales; and I’ve seen references to the Swedish PMI as a lead indicator for Europe. But these measures are impacted by specific factors such as the supply of ships and the vagaries of specific industrial sectors and economies.
Better than relying on a single indicator is to look across a portfolio of small advanced economies. With high national exposures to the global economy, the collective behaviour and performance of small advanced economies provides a good sense of the outlook for the global economy.
The small advanced economy leading indicator I construct (using data from 13 selected small advanced economies) shows a less marked deterioration in economic strength. This SAELI index is well off its highs through 2017 and 2018, but there is some indication that the deceleration is flattening off. This can be seen in several of its component parts. Across the small economy group, export growth is negative (around -3% in USD terms), but it has been stable at these levels over the past few months. Industrial production has held up reasonably well, growing faster than in the US. As elsewhere across the advanced economies, small economy PMI readings have reduced; but for the most part remain above 50. Small advanced economy GDP growth for the year to Q1 continued to out-pace that of larger economies, a positive sign.
And small economy equity markets continue to perform in line with relevant global benchmarks, despite the market turbulence of the past several months in response to changing sentiment on trade wars and the global outlook.
In addition to the growth slowdown underway in most small advanced economies, there are a series of additional downside risks that largely relate to political factors such as trade wars. Indeed, I think we are in the early stages of a disruptive policy regime change that will last for some time: a shift from a regime based on policy rules to a regime based on policy discretion, in which economics and politics interact much more directly. This will be much more like the 1970s than the 1990s, a period of economic and political turbulence, which will be more challenging for firms, investors, and economies to navigate.
But these developments are not yet fully reflected in the global economic data. The performance of the group of small advanced economies – the canaries in the mine of the global economy – is weakening, and will likely continue to do so gradually, but the lead indicator is not yet flashing red. Another few months of weaker data from across the small advanced economies could change this assessment, but as it stands I do not see a sharp growth slowdown ahead in H2.
So while the Singapore data are ugly, and the Singapore outlook for H2 2019 is relatively weak, these data points should not be over-interpreted to construct a narrative that there is a rapid deceleration ahead in world trade and GDP growth.
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Dr David Skilling
Director, Landfall Strategy Group
www.landfallstrategy.com