SINGAPORE (June 23): Following a volatile first quarter in 2020 and an unprecedented amount of quantitative easing as well as fiscal stimulus, global financial markets have stabilised in the months of May and June, says UOB in its quarterly global outlook for 3Q20.

Taking on a more positive outlook than its previous report in March where it warned of a sharp and widespread global “synchronised recession”, the bank says that the massive coordinated monetary easing and fiscal stimulus by governments around the world appear to have done their job in stabilising asset and financial markets.

However, the bank remains cautious moving forward, questioning whether this recovery in asset and financial markets is sustainable, and what will happen once the government assistance wears off.

“After all, the World Bank has just downgraded its global outlook further and now calls for the steepest global growth slowdown in 150 years, expecting a sharp 5.2% global GDP contraction for 2020. This is worse than the previous forecast made in April by the IMF which calls for a 3% global contraction for 2020,” it says.

This quarter, UOB says it sees “better odds” of a V-shaped recovery, compared to the previous quarter, given the encouraging rebound in activity in China following its Covid-19-induced lockdown, and the strong risk-on recovery in global assets and financial markets.

"As such, we now see a lower base case of a 45% chance of a U-shaped recovery, followed by a larger 30% chance of a V-shaped recovery and a similar 25% chance of a weak L-shaped recovery," it says.

In Singapore, UOB foresees a recession looming, in line with the economic performance across the ASEAN region. It has also kept its full-year headline and core inflation at -0.3% in 2020.

The republic’s gross domestic product (GDP) contracted 0.7% y-o-y and (-4.7% q-o-q) in 1Q20, which is better than the advanced estimates of -2.2% y-o-y, and 10.6% q-o-q previously released by the Ministry of Trade and Industry (MTI) on March 26.

See: Singapore economy faces worst recession since independence with growth expected to fall between -7% and -4% : MTI

This is the first year-on-year contraction since the Global Financial Crisis in 2009.

“Owing to the economic drag from COVID-19 and the measures in place to curb the infection, we continue to expect GDP to contract 4.0% in 2020, which is at the top-end of the recently downgraded MTI growth outlook at a range of -4.0% to -7.0%,” it says.

Consumer prices continued to fall in 1H20, while headline inflation fell 0.7% y-o-y (-0.9% m-o-m), marking its second straight month of deflation.

Core prices also fell by 0.3% y-o-y over the same period (compared to -0.2% y-o-y in March 2020).

In its outlook, the bank says low oil prices and deteriorating consumer demand will likely continue to drag down domestic prices.

A decline in spending in Singapore’s tourist-facing industries may also lead to sharp reductions in aviation and tourism activities as long as global travel restrictions stay in place.

Following Singapore’s containment efforts that have led to significantly lower community cases and stabilised infections in the migrant workers community, the bank expects the Monetary Authority of Singapore (MAS) to keep its monetary policy unchanged in October 2020, if containment efforts continue to curb further outbreaks.

On the foreign exchange market (forex), the bank updated its point forecasts to $1.39 to US$1 in 3Q20, $1.38 in 4Q20, and $1.36 in 1Q21 and 2Q21.

“The Singapore Dollar Nominal Effective Exchange Rate (S$NEER) stayed in narrow range just below the policy midpoint in the 2Q after MAS flattened the rate of appreciation of the S$NEER at end-March,” it says.

“This indicates the inertia the SGD has in participating with the global recovery theme, in-line with the government’s cautious approach in reopening the economy in three phases. With growth officially guided lower to a range of -4% to -7% for 2020, risks to the S$NEER inevitably will be tilted to the downside,” it adds.