Speed and bumps lie in store for economy

Manufacturing recovery likely to anchor rebound in S'pore's Q2 GDP

[SINGAPORE] Unexpectedly strong manufacturing growth in April and May has led economists to expect a larger rebound in Singapore's gross domestic product (GDP) when the Ministry of Trade and Industry releases flash estimates for the second quarter on July 12. But they are not changing their full-year forecasts yet, as the ride may get bumpier in the second half of this year.

The median of 10 forecasts submitted to Bloomberg in recent weeks put Q2 growth at 1.9 per cent year on year, up from the 1.5 per cent median forecast reported by the central bank's survey of professional forecasters at the end of May.

This would be a significant improvement over Q1, when GDP grew a mere 0.2 per cent year on year, as the manufacturing sector shrank 6.8 per cent from a year ago to negate most of the robust growth in financial services and construction.

Some are even more optimistic. ANZ's Asia Pacific economist Daniel Wilson thinks Q2 GDP could grow 3 per cent year on year - implying a 12.1 per cent quarter-on-quarter annualised jump after adjusting for seasonal factors.

"This should be driven by manufacturing, while we also expect the services sector to contribute positively," he said.

Industrial production rose 5 per cent year on year in April and 2.1 per cent in May, thanks to a spike in pharmaceuticals production and the start of an electronics recovery.

"One of the largest components of the services sector, financial and insurance, should accelerate in Q2 with higher volumes of transactions on the SGX," said Mr Wilson. The sharp pick-up in non-oil re-exports for May also signals decent growth in the transportation sector, he added.

And though Barclays economist Joey Chew thinks that the services sector's growth may be milder in Q2 after a very strong showing in Q1, her forecast of 1.6 per cent year-on-year growth in Q2 is still higher than before.

However, this has not altered her full-year forecast of 2 per cent growth, signalling gradual recovery. The official forecast is that the Singapore economy will grow 1-3 per cent this year.

"I don't think anything has materially changed; think of it as front-loaded growth. We have been expecting exports to pick up and drive growth in the second half. But it appears that production has gone ahead and risen in Q2, ahead of exports," she said.

Mr Wilson said that the durability of the recovery will depend on growth in external demand. The purchasing managers' index (PMI) indicates that inventories have been building up in anticipation of future demand. "If this fails to eventuate, the rebound in industrial production will likely be short-lived and manufacturers will be dealing with an inventory overhang," he said.

Weaker sentiment and modest spillover from the slowdown in China may also contribute to a temporary pullback in growth in Q3, said Citi economists Kit Wei Zheng and Brian Tan.

They observed that the spurts and subsequent pullbacks in economic activity that have characterised Singapore's growth since 2011 have continued into this year. "While an anticipated pick-up in US demand in the second half should sustain the recovery, we nonetheless expect the recovery path to be choppier than at the start of the year," they said.

If external demand recovers, the pace of growth might still pale in comparison to previous recoveries. With labour constraints, limited productivity improvements and real exchange rate appreciation, firms may forgo meeting increased demand so as to avoid raising their costs and eroding profit margins, the Citi economists said.

Source: Business Times, 8 Jul 2013