Singapore Q2 GDP shows economy still under stress, may need more stimulus

By Jongwoo Cheon

SINGAPORE (Reuters) - Singapore's economy grew slower-than-expected in the second quarter on softer manufacturing and construction, keeping pressure on the central bank to further ease policy in the face of sluggish global demand and concerns over Brexit.

The trade-reliant economy expanded 0.8 percent in the April-June period from the previous three months on an annualised and seasonally adjusted basis, the Ministry of Trade and Industry said on Thursday in a statement.

That compared with a 0.9 percent rise forecast in a Reuters poll and 0.2 percent growth in the first quarter, suggesting only a modest bounce that could unravel on the Brexit fallout.

Manufacturers remained under stress, with the sector growing 0.3 percent in the second quarter from the previous three months, sharply down from an 18.4 percent expansion in the first quarter.

"The sequential slowdown of the economy, especially in the manufacturing sector, means that the MAS must choose between a weaker currency or lower interest rates," said Trinh Nguyen, senior emerging Asia economist for Natixis in Hong Kong, referring to the Monetary Authority of Singapore.

Nguyen expects further monetary policy easing in October through a re-centering of the S$NEER policy band lower.

The MAS manages policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners based on its nominal effective exchange rate (NEER).

In April, in an effort to weather a slowdown in Singapore's biggest export market China and falling consumer prices, the central bank unexpected eased policy by setting the rate of appreciation of the policy band at zero percent.

The Singapore dollar has strengthened on safe-haven demand in emerging Asia, exacerbating both deflationary pressures and faltering exports - a development that is doubly worrying given fallout on global growth from Britain's shock vote to leave the European Union.

BREXIT WOES

Indeed, the anaemic economic activity and the strong local currency have already prompted some economists to tip the central bank to ease again in October.

On Tuesday, the Brexit worries prompted Malaysia's central bank to unexpectedly cut interest rates for the first time in seven years. Other global central banks are also expected to offer more stimulus or maintain their ultra-low rates to stoke demand.

"What will cause the MAS to think twice... is that Brexit risks are not reflected in these numbers," said Vishnu Varathan, senior economist for Mizuho Bank in Singapore.

Singapore expects the economy to grow 1-3 percent this year, though economists have trimmed their projections to 1.8 percent, a central bank survey showed.

Signs that the economy is faltering are ample, with vacant floors in some central shopping malls and other businesses also suffering a labour shortage due to immigration curbs.

"We expect economic growth and core inflationary pressures in Singapore to slow in the second half of this year," said Roy Teo, senior FX strategist for ABN AMRO in a note to clients.

"Hence there is a case for the MAS to lower the centre of the policy band later this year in October."

(Additional reporting by Marius Zaharia and Masayuki Kitano; Editing by Shri Navaratnam)