BUSINESS conditions took a turn for the worse in the second quarter, following two straight quarters of rapid growth, according to the latest Business Times-Singapore University of Social Sciences (BT-SUSS) Business Climate Survey.
This comes as optimism over future prospects in the next six months dimmed, setting the stage for a more volatile second half of the year.
Economists said the results were not a surprise, given the spate of events during the survey period, which likely coloured sentiment.
DBS economist Irvin Seah said: "The survey coincided with concerns regarding a trade war between US and China, as well as the release of advanced Q2 GDP estimates, which showed that growth momentum has slowed."
The survey was conducted between June 18 and July 17, and 149 firms responded.
Commenting on the results, CIMB Bank economist Song Seng Wun noted: "Typically, the second half of the year is seasonally stronger for services as they prepare for the festive season. But new orders have slowed down, which indicate more caution from businesses."
Despite Q2's weaker figures, the various indicators in the survey still point to expansion - albeit at a slower pace.
Sales net balance fell by five points to 6 per cent in Q2; the net balance of new orders dipped by four points to 8 per cent.
The net balance is the difference between the percentage of firms reporting an increase and those reporting a decrease. A positive net balance suggests expansion and a negative one, a contraction.
Profits in Q2 stayed the same as in the previous quarter, with a net balance of -1 per cent. It is the only indicator to remain in contractionary territory.
Business prospects for the second half of the year went down by six points to 15 per cent.
If differentiated by size of firms, the survey findings point to large firms continuing to outperform small ones in all indicators in Q2.
Small firms were badly hit across the board. Sales net balance fell by 22 points to -44 per cent, profits net balance fell by 13 points to -58 per cent, new orders dived by 32 points to -48 per cent, while business prospects declined 14 points to -18 per cent.
But on a brighter note, a sectoral breakdown indicated a more diversified performance in Q2.
Among the various sectors, the financial and business-services sector continued to be the star performer in terms of sales and profits.
Manufacturing remained tops in new orders, while transport and telecommunications firms became more optimistic about the next six months.
At the group level, foreign construction firms managed to achieve more new orders than a quarter ago, the survey found.
The consultants in the survey, Chow Kit Boey and Chan Cheong Chiam, said this could signal the start of a recovery in construction. "Its negative GDP growth rate has been diminishing since Q3 2017."
A regression analysis of the survey results predicts growth to come in at between 3.2 and 3.8 per cent for Q3, but this projection is more optimistic than what some other economists predicted.
CIMB's Mr Song forecast that Q3 growth is likely to come in at under 3 per cent, as trade tensions weigh on external-facing sectors.
DBS' Mr Seah also believes that the 3.2-to-3.8 per cent range is "a bit on the high side"; his view is that Q3 growth will be the weakest this year, at under 3 per cent.
He said: "There are three reasons: the first is that there was an exceptionally high base in the period last year. That's a technicality."
Next, sequential growth is likely to ease further because of heightened risk in the external environment due to the trade war, resulting in capital outflows and risk aversion in financial markets, he said.
Finally, the electronics cycle probably peaked in the first half of the year, and is likely to moderate in Q3, he said.
For the rest of the year, trade tensions are likely to dictate business sentiment, but economists flagged other factors that could impact Singapore's economy.
Mr Seah said that developments to watch out for include the effects of the latest round of property cooling measures, and interest rate hikes.
Faster-than-expected interest rate hikes would slow down economic activity, he said. Meanwhile, property curbs will affect the financial and business-services sectors in the coming months, but the severity of the impact remains to be seen, he added.
Mr Song concurred that aside from the trade war, the recent property cooling measures are likely to be a drag on growth in the second half of the year.
Coupled with weaker demand for trade-related services as well as a slowdown in manufacturing, businesses are less confident about the next few quarters, he noted.
He said another factor that could derail growth is geopolitical risk, citing the recent US economic sanctions against Iran as an example.
Mr Song expects more clarity on the economic outlook by the end of September, which is when more decisions on the trade tariffs will be made firm.
Ms Chow said that one possible positive impact on the Singapore economy for the rest of the year could be the partial lifting of sanctions on North Korea.
But she added: "A negative impact could come from the devaluation of the Chinese yuan. Inflation is likely to rise due to poor harvests from severe drought or floods."