Beware of technical recession: OCBC

Fears stoked as government reveals a slower 3.4% qoq growth pre-estimate for Q4 2011.

A technical recession, defined as two consecutive qoq contractions, could be in the cards if the worst case scenario of a dampened China demand and escalated Eurozone meltdown waylays the economy next year.

Here's more from OCBC:

Singapore’s growth slowed in Q4 2011, as manufacturing and services momentum cooled.
Q4 flash GDP growth cooled from +5.9% yoy (+1.5% qoq saar) to +3.6% yoy (-4.9% qoq saar), close to our +3.5% yoy (-5.3% qoq saar) forecast. The main drags were manufacturing (-21.7% qoq) and construction (-6.7% qoq), whereas services managed to claw back into positive territory (+3.4% qoq) after 2 consecutive quarters of qoq contraction. The manufacturing sector continued to be weighed down by electronics weakness and a biomedical pullback, while the construction sector may begin to moderate further given the cooling momentum in the private residential property sector following additional measures. In on-year growth terms, manufacturing led with 6.5%, followed by services at 3.2% and construction at 1.7% in Q4 2011.

2011 GDP growth of 4.8% yoy contrasts with the stellar 14.5% seen in 2010.
Full-year growth in 2011 of +4.8% slightly undershoots the official forecast of around 5%, but at least the services sector returned to marginal positive growth momentum of +3.4% qoq saar after 2 consecutive quarters of qoq contraction, which was attributable to the wholesale and retail trade sector.

The 2012 growth outlook remains very murky, with risks still leaning to the downside.
The 2012 growth outlook remains murky for now, with external headwinds of a slowing global economy, Eurozone sovereign debt problems (with no light at the end of the tunnel yet) and a slowing Chinese economy. Note Minister Lim had already warned of a “longish” period of slow growth. The possibility of a technical recession (defined as two consecutive quarters of quarter-on-quarter contraction) cannot be ruled out in 2012, albeit it may not necessarily materialize in Q1 2012. To get a technical recession in Q1 2012, GDP growth will have to sink below 2.3% yoy this quarter, which would imply a halving of the Q4 2011 growth momentum, as China’s growth slowdown starts to filter more seriously into the regional manufacturing activities. Even discounting a muddle-through scenario for the Eurozone debt crisis rather than a disorderly adjustment scenario, Singapore’s 2012 growth prospects will likely tilt towards the lower-end of the current official forecast range of 1-3% if the assumed second half rebound is delayed or does not materialize.

Some calibrated policy response looks probable, but it may too early to count on monetary policy loosening or unwinding of recent policy measures.
A calibrated policy response looks probable, for instance in the form of a modestly stimulative budget in February. The Singapore government could run with a mild budget deficit of <1% of GDP to keep some powder dry should global conditions continue to deteriorate. Any fiscal assistance would likely come in the form of helping businesses cope with the high business cost environment given the deteriorating external demand conditions, and helping lower-income households to cope with price adjustments. In our view, policymakers may be reluctant to see any pre-emptive unwinding of recent policy measures such as the foreign worker levy hikes and Additional Buyers’ Stamp Duty (ABSD) as those are more medium-term structural measures targeting the absorptive capacity of the Singapore economy.

Inflation remains the bugbear against further monetary policy loosening for now.
The case for further monetary policy loosening at the April MPS may prove trickier, given that headline and core inflation have been stickier than earlier anticipated on the downside, which is attributable to pass-through effects from the tight labour market, and relative price adjustments in the foreign labour market and COE premiums. Note the headline CPI inflation had reacceleration from 5.4% in October to 5.7% in November 2011. If anything, the announced taxi fare adjustments, electricity tariff hikes and the cut in COE quota would continue to add to CPI inflationary pressure in Q1 2012.