SINGAPORE (July 12): An unexpected contraction in Singapore’s economy sent a warning shot to the world economy as simmering trade tensions wilt business confidence and activity.

Gross domestic product in the export-reliant city-state shrank an annualised 3.4% in the second quarter from the previous three months, the biggest decline since 2012. That was worse than the 0.5% expansion forecast in a Bloomberg survey of economists and followed growth of 3.8% in the first quarter.

Like South Korea’s economy – which already contracted in the first quarter – Singapore is often held up as a bellwether for global demand given its heavy reliance on foreign trade. The bad data comes ahead of China trade figures later Friday and quarterly GDP numbers on Monday, which will likely show a clear weakening in the economy.

“Singapore is the canary in the coal mine, being very open and sensitive to trade,” said Chua Hak Bin, an economist at Maybank Kim Eng Research in Singapore. The data “points to the risk of a deepening slowdown for the rest of Asia.”

Across Asia and Europe, factory activity shrank in June while the US showed only a meager economic expansion. Asia is the world’s growth engine and contributes more than 60% of global GDP, according to the International Monetary Fund.

Rob Subbaraman, head of global macro research and co-head of global markets research at Nomura Holdings Inc, concurred, saying the “large downside GDP miss does not bode well for the rest of Asia.”

Singapore’s complicated integration in regional and global supply chains makes it vulnerable to a slowdown in world growth and tariff wars. Exports – which amount to 176% of GDP – have already taken a big hit over the past few months, with shipments plunging in May by the most since early 2013.

“I thought the numbers would be bad, but this is ugly,” Chua said. “The whiff of a technical recession is real. We thought it might be shallow, but the risk now is that it might be deeper.”

Compared with a year ago, Singapore’s GDP growth slowed to 0.1% in the second quarter, lower than the 1.1% median estimate in a Bloomberg survey. The Ministry of Trade’s figures are advanced estimates based on the first two months’ data, and will likely be revised when the final estimates are published next month.

The Singapore dollar fell as much as 0.1% to 1.3588 against the US dollar after the data.

Aside from trade tensions, a cooling technology boom is weighing on the outlook. About 40% of Singapore’s exports are integrated circuits alone, according to Tuuli McCully, head of Asia-Pacific economics at Scotiabank in Singapore.

“The downturn in the global semiconductor sector is reflected in Singapore more than in most countries in the region,” McCully said.

The slump wasn’t restricted to Singapore’s export sector only. While manufacturing contracted an annualized 6% in the second quarter from the previous three months, construction plunged 7.6%, reversing a 13.3% expansion in the first quarter. The services industry shrank 1.5% in the second quarter.

That weakness may prompt the Monetary Authority of Singapore, the nation’s central bank, to keep policy unchanged in October or possibly ease. The MAS uses the exchange rate as its main tool and left policy settings steady in April.

“If by October there is a recession and the US-China trade war still fails to find a resolution, the MAS would probably have to ease policy,” Chua said.

The government sees the economy expanding 1.5%-2.5% this year, compared with 3.1% in 2018. Officials are set to revise that projection in August, Minister for Trade & Industry Chan Chun Sing told Parliament this week, adding that Singapore was “well-placed to weather the storm” given its sound economic fundamentals, strong fiscal position, and progress in restructuring the economy.

“As weak as Singapore’s standstill in 2Q GDP was, 2H will probably be much worse without a rapprochement in US-China trade relations. Our forecast for a 0.2% year-on-year contraction in 2019 remains on course,” said Tamara Henderson, Bloomberg’s Asean economist.

A restart to US-China trade negotiations has done little to convince economists that the global economy can skirt a slowdown through the end of 2019 and perhaps beyond. Morgan Stanley analysts last month cut both their 2019 and 2020 growth forecasts by 20 basis points each, to 3% and 3.2%.

“With a resolution of the US-China trade conflict and a rebound in the global tech cycle both still elusive, the downside risks to growth in the region are mounting,” said Krystal Tan, an economist at Australia & New Zealand Banking Group in Singapore.