Economists cap optimism despite strong Q3 numbers

20131015-bt-economist-cap-q3-gdp-optimism-pic THE Singapore economy accelerated in Q3 to overtake market expectations with year-on-year growth of 5.1 per cent - yielding a smaller than feared one per cent annualised contraction from the previous quarter. But the volatility and uncertainty attached to these figures are holding most economists back from hiking full-year growth forecasts, for now.

Such volatility was also alluded to by the central bank, which yesterday decided to keep its monetary policy stance of a rising Singapore dollar unchanged for a third round. The Monetary Authority of Singapore's (MAS) warned that intensified transfers of higher business costs to consumer prices may push core inflation up from 1.5-2 per cent this year to 2-3 per cent in 2014 - tempering optimism over the economy's Q3 showing.

Prior to the Ministry of Trade and Industry's (MTI) release of flash estimates for Q3 GDP yesterday morning, economists had expected 3.8 per cent year-on-year growth and a sharper sequential contraction of 4 per cent - four times the government's advance estimate of a one per cent quarter-on-quarter fall. This was despite the growth surge in Q2 being revised up to 16.9 per cent, from an earlier reported 15.6 per cent.

While MTI put forward the growth factors in Q3, MAS dwelt on the sequential pullback. "The financial services sector shrank as equity and foreign exchange market activities fell on concerns over a reduction in the pace of asset purchases by the Fed and the threat of military intervention in Syria," its monetary policy statement yesterday said.

In quarter-on-quarter terms, the services sector's annualised growth rate skidded to one per cent after Q2's 12.3 per cent. But services remained the key pillar of growth, expanding 5.7 per cent year-on-year due to healthy expansion in the finance and insurance and wholesale and retail trade sectors, MTI said.

MAS noted that the manufacturing sector was a drag on GDP growth, as the weak electronics and pharmaceutical clusters triggered a sequential decline in output in July and August, and a flash Q3 estimate of a 3.4 per cent contraction quarter-on-quarter.

Compared to a year ago, however, it grew 4.5 per cent, supported by the transport engineering and electronics clusters, MTI said.

Overall, the latest Q3 figures put growth for the first nine months of the year at around 3.2 per cent, the upper end of the official 2013 growth forecast of 2.5-3.5 per cent, which was left untouched.

The positive surprise did prompt at least three banks - Bank of America Merill Lynch, Citi and OCBC - to raise their 2013 growth forecasts by between 0.4 and 0.8 of a percentage point. But the majority of economists stuck to their positions, lest the flash estimate - based largely on July and August data - is revised downwards next month when final figures for Q3 are unveiled.

"Even though growth seems to carry an upside risk for now, we would not alter our growth outlook for the rest of this year and next year as the structural adjustments in the economy, notably in the labour market, would put a dampener on growth," said Nomura economist Enrico Tanuwidjaja. External uncertainties such as the ongoing fiscal negotiations in the US and slower growth in China are also cause for caution over Q4, he added.

While market views were mixed as to whether a technical recession - defined as two consecutive sectors of quarter-on-quarter contraction in GDP - is on the way, most economists gave the notion short shrift. "With quarter-on-quarter growth data distorted by volatility, the risk of a Q4 technical recession should be kept in perspective and not unleash undue panic," said Mizuho Bank economist Vishnu Varathan.

Looking further ahead into next year, MAS said that 2014's growth would be similar to the 2.5-3.5 per cent pencilled in for 2013. Barclays economist Joey Chew thinks that the MAS seemed "fairly sanguine about the outlook for Q4 and 2014".

While the central bank did cite uncertainties stemming from the recurring fiscal impasse in the US, and potential disorderly market adjustments to the Fed's tapering, it also removed mention of the eurozone as a risk to the global economic outlook.

Instead, yesterday's statement focused on the eurozone's improvement in business sentiment and how, along with the gradual revival in US labour and housing markets and Japan's expansionary macroeconomic policies, this ought to support global activity, she noted.

But the MAS did give a more measured assessment on Asia. While previous statements highlighted robust domestic demand, yesterday's simply noted that most Asian economies "have thus far withstood recent bouts of financial market volatility and the tightening of financial conditions, and are taking policy measures to sustain growth".

There are other uncertainties too. Mr Varathan noted that Singapore's measures to ensure prudent borrowing such as tightened debt servicing and loan to valuation ratios "will help mitigate the risks of an unruly unwind in asset markets, but come at the expense of growth in the near term".

Also, wobbly Chinese exports underscore the effect of a strong Singapore dollar on local exporters - a strong Singapore dollar that will remain on an appreciating path. "The upshot is that recovery is as delicate as is the policy balance that has been struck," said Mr Varathan.

Source: Business Times, 15 Oct 2013