Is a recession possible in Singapore? How could it affect the global economy and the gold market?

In the second quarter of 2015, Singapore’s economy shrank 4.6 percent compared with the previous quarter. And the recent trade data (non-oil exports fell 8.4 percent in August annually) suggests that the GDP could contract again in the third quarter, marking a technical recession. Singapore is another country (after Australia, Brazil, Canada, New Zealand, Russia, and others), which experiences economic perturbations due to the Chinese/global slowdown and the expectations of a Fed hike.

Just like other countries in the region, Singapore enjoyed impressive economic growth since 2009 fueled by capital inflows, low interest rates and credit expansion. However, the bust is inevitable and it may be particularly significant in Singapore. Why? First, Singapore’s benchmark interest rate is tied to the U.S. Fed Funds Rate in order to maintain U.S. dollar – Singapore dollar exchange rate stability. But the ZIRP, which is inappropriate even for depressed economies, is definitely absurd for fast-growing economies like Singapore. And about 70 percent of Singapore’s mortgages have floating interest rates, so the property market bubble could end very badly when the Fed eventually raises interest rates. Second, Singapore is sensitive to global developments and external demand, since it is a small open economy with total trade over three times its GDP.

This is why Singapore is considered to be useful recession barometer for the rest of Asia. Investors should be aware that Singapore was one of the first few countries in recession during the 2001 tech recession and the 2008 global financial crisis. And because the country serves as the financial center for Asia, its problems may spill over to other countries. Actually, Singapore is the fourth biggest financial center in the world (with financial sectors six times larger than the country’s GDP) and one of the 25 financial centers that the IMF regards as systemically important. So, any financial crisis in Singapore could put the entire global financial system in jeopardy. The rise in global risks would be positive for the price of gold, but the potential for gains would be limited by the downward pressure exerted by a stronger U.S. dollar.

The take-home message is that Singapore’s GDP contracted in the second quarter and it is likely to decline also in the third quarter, putting the country into technical recession. A possible recession may be important for the whole world, because the country is a very important global financial center. Thus, Singapore’s economic problems could spur some safe-haven demand for the shiny metal. However, there may be also some capital flows to U.S. dollar denominated assets and, thus, downward pressure on the price of gold.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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