Businesses are more bullish about prospects in Singapore than overseas in the next 6 months, although firms are on the whole less optimistic than they were a quarter ago, according to the latest Business Times-Singapore University of Social Sciences (BT-SUSS) Business Climate Survey.

Commenting on the findings, OCBC chief economist Selena Ling said: “If you think of the events that unfolded in Q1, there were some formidable headwinds that come to mind.”

The Russia-Ukraine war, the US Federal Reserve’s increasing hawkishness and China’s slowdown are factors that target all 3 of Singapore’s major markets - the United States, the eurozone and China, she noted.

“Domestically, Omicron cases have subsided and the Singapore’s economy has opened up faster than expected towards the end of Q1,” she added.

The Republic’s labour market is also recovering well, said DBS senior economist Irvin Seah, which is why firms are more optimistic about domestic economic conditions.

Noting that there may not have been sufficient clarity with regard to border measures in the region when the survey was conducted from Mar 15 to Apr 14, he noted: “I do feel that the outlook for overseas markets, particularly in Asean, will gradually improve, but I can’t say the same for China.”

He added that while the outlook for other overseas markets should also generally improve, there is a lingering concern about softening consumer demand as a result of high inflation and tighter monetary conditions.

Still, authors of the quarterly survey are expecting second-quarter gross domestic product (GDP) to come in at 5.1-6.1 per cent - a figure that several economists said is higher than they had predicted.

Maybank senior economist Chua Hak Bin’s outlook for Q2 is about 2-3 per cent, and his 2022 full-year forecast, at 2.8 per cent, is also lower than the official range of 3-5 per cent.

While the optimism on Singapore is likely due to its economic reopening, Dr Chua said global headwinds are likely to dampen the reopening tailwind and undercut growth in the coming quarters.

OCBC’s Ling, whose Q2 growth forecast is about 4.4 per cent, said there may be some upside risks following Singapore’s move to ease Covid-19 restrctions and border controls, which would help the retail, food and beverage (F&B) and tourism-related industries.

Q2’s GDP could also be dragged by sluggish growth in the manufacturing sector, which saw its first quarter-on-quarter decline in Q1.

Citing supply-side constraints, DBS’s Seah said the Russia-Ukraine war has disrupted the supply of raw materials used in the production of semiconductors, adding that this would not only constrain chip output but also other products that depend on them. “That to some extent would weigh on the performance of the manufacturing sector in the coming weeks. And on the other hand, we have high inflation - there will be further cost pressures across all the businesses, not just manufacturing but services as well.”

But “tremendous cost pressures“ are threatening to erode profits at the same time, said Seah, who has penciled a 4.5 per cent growth.

This was already reflected in the BT-SUSS survey findings, where profits remained in the red in Q1 while other indicators stayed in expansionary territory.

Profit net balance dropped 6 points to -10 per cent in Q1, with foreign firms the only group that posted profits.

Sales and orders or new business were in expansion for the fourth straight quarter, although the net balance for both dipped slightly. The net balance in sales fell 5 points to 10 per cent, while that for orders or new business slipped 2 points to 11 per cent.

The survey noted that fewer firms encountered higher sales of over 25 per cent, and more firms were hit by sales decline of over 25 per cent, compared to a quarter ago.

At the same time, all groups of firms saw an expansion or no contraction in orders or new business.

Business prospects took the largest hit among these indicators, with the net balance tumbling 23 points to 22 per cent in Q1, indicating that firms had a less optimistic outlook for the next 6 months, compared to a quarter ago.

In particular, small firms appear to be as optimistic as they were in the previous quarter, while large firms were less so, the survey noted.

Large firms suffered slightly lower expansion in sales and orders or new business, as well as a slight decline in profits into loss, it added.

“The smaller firms, I would think, would focus more on the domestic market, so they’ll benefit from the domestic recovery and the improvement in the labour market conditions, whereas for bigger firms, traditionally their markets of focus would be external, and the external outlook is not very bright, particularly key markets like China,” said DBS’s Seah.

Foreign firms, which were also as optimistic as they were in the previous quarter, saw expansion in all 4 indicators, even though sales and orders or new business were lower than a quarter ago.

While local firms received increased orders or new business and posted stable sales, they were hit by more loss and diminished optimism, according to the survey.

The gap between foreign and local firms has narrowed in sales and orders or new business, but widened in profits and business prospects, it added.

Explaining the findings, Seah said: “They are getting more orders but the thing is that cost has gone up even more, so the local firms are seeing more losses. But they’re suggesting that the foreign firms basically are more profitable, that they’re able to contain their costs and basically price upwards even though they’re getting fewer orders.”

This could be due to a variety of reasons, such as economies of scale, higher productivity and better technology, which may have helped shield foreign firms from rising costs.

Foreign multinationals may also be more reliant on automation and large-scale production, which means the increasing labour costs would not affect them as much, Seah added.

Credit: Business Times