Singapore's economy is expected to avert a technical recession in the third quarter this year, thanks to a mild improvement in the manufacturing sector, though support is still warranted, according to a latest report by DBS Group Research.

According to DBS analysts, the economy will likely register a growth of 0.4 per cent year on year, and a growth of 2.1 per cent quarter on quarter in the third quarter, based on a seasonally adjusted annual rate.

"Yet, output gap has turned even more negative in the second quarter of 2019. This explains why inflation has persistently surprised on the downside thus far. Overall inflation for the year is projected to average 0.5 per cent, before rising to 1.1 per cent in 2020," the analysts said.

They added that inflation continues to slip in recent months on the back of lower electricity tariffs, though the headline number is likely to bottom out, before rising steadily in the coming months.

Looking ahead, spikes in oil prices could be one of the key drivers of inflation. A 10 per cent rise in oil prices, for instance, will lift the consumer price index inflation by about 0.3 percentage point, the analysts noted.

The report, which was released yesterday, also highlighted that a robust fiscal budget is expected early next year to render support for the economy, while the Monetary Authority of Singapore (MAS) will most likely ease the monetary policy stance moderately next month.

"An outsized accumulated surplus of about $15.6 billion implies ample room for aggressive fiscal support for the economy. We expect a highly expansionary fiscal policy early next year," said the DBS analysts.

They also expect the MAS to slightly decrease the annual appreciation pace of the S$Neer (Singapore dollar nominal effective exchange rate) policy band from 1 per cent to 0.5 per cent, at its policy review in mid-October.

"The pass-through from Fed cuts to Singapore dollar rates has been muted amid persistent US dollar strength and tight Singdollar liquidity. Short-term Singdollar rates are still somewhat elevated," the analysts noted.

Overall, the global slowdown continues to weigh on the domestic sector, with significant implications for the labour market. The purchasing managers' index (PMIs) for key markets and Singapore are all falling amid slowing global demand and the trade war. However, there are some signs of stabilisation in the PMIs for Singapore and China, the analysts said.

"Non-oil domestic exports to China has spiked, but it remains to be seen how sustainable that will be against the backdrop of the ongoing trade disputes between the US and China."

Domestically, overall services growth continues to moderate, led by the contraction in wholesale and retail trade services.

The analysts noted that overall loan growth is still slipping, driven mainly by a decline in consumer and housing loans, largely due to weak consumer sentiment and a sluggish property market.

In addition, Singapore's labour market has also weakened, with the ratio of job vacancy to unemployed person dipping to below one, where employment growth eased to a three-year low.

In turn, a soft labour market has translated into weak growth in the retail sector. Though visitor arrivals have picked up, it remains lower compared with the average level last year, the analysts said.