Forecasters point to sluggish Q1 growth

WITH manufacturing's poorer than expected showing so far this year, Singapore's economic growth in the first quarter is expected to have slowed from that of the previous three months.

In quarter-on-quarter annualised terms, gross domestic product (GDP) is forecast to have expanded a mere 0.1 per cent after seasonal adjustments, after Q4 2014's 4.9 per cent sequential growth. And according to the median forecast of nine economists polled by Bloomberg, year-on-year growth remained flat at 2.1 per cent in Q1, unchanged from Q4 2014's pace.

These market forecasts - which put Q1's growth at the low end of the official 2015 forecast of 2-4 per cent growth - come ahead of the Ministry of Trade and Industry's release of advance Q1 growth estimates on April 14. The central bank is due to release its monetary policy statement then too.

As often is the case, the median masks a fair range of views among market economists. The most optimistic thinks year-on-year Q1 growth hit 3.5 per cent, while another believes growth may have slowed to 1.6 per cent. Similarly, the top estimate of quarter-on-quarter growth was 0.7 per cent, but the most pessimistic thinks GDP probably contracted one per cent over the quarter.

Where there is agreement on is that manufacturing has been weaker than expected, with the effect of tempering growth expectations. Factory output rose only 0.9 per cent year on year in January, and then disappointed for a second straight month with a 3.6 per cent contraction in February, leading several economists to adjust their Q1 GDP forecasts downwards.

And though the industrial production figures for March will only be released later next week, DBS economist Irvin Seah is expecting further sluggishness, as last month's purchasing managers' index continued to point to contraction.

For economists, the latest forecasting exercise is a familiar one of looking at both quantitative and qualitative indicators.

Of the high-frequency data that pertains to the Singapore economy, manufacturing and exports data top the lists of what forecasters look at. "Industrial production figures pretty much dominate, and is the variable that moves the needle," says Credit Suisse economist Michael Wan.

But they incorporate other indicators into their forecasting models too, such as non-oil domestic exports, loans growth, market trading volumes and construction progress payments.

"Container throughput and re-export figures show the trading transportation services story, while real estate transaction volumes show sentiment and business services performance," says Mr Seah. OCBC economist Selena Ling also looks at sentiment indicators such as business and consumer confidence surveys.

Indicators have shifted in importance over time. Retail sales and tourist arrivals are not as useful for near-term forecasting, as they are not released as promptly as the others, says Mr Seah.

Singapore being the open, export-driven economy that it is, forecasting its growth outlook also very much involves looking at manufacturing, consumption and other data from key export markets such as the US, China and the eurozone.

"The impact of external economies like US and China," says Ms Ling, "are mainly assessed through the NODX data, as well as through other leading indicators like the electronics book-to-bill ratios."

Yet, data cannot show everything, and there is definitely an art to the science of forecasting, she says.

Mr Seah agrees: "You can have a sophisticated or simple econometric model, but at the end of the day you need to make a judgment call. If you're just going to strictly depend on your model, 11 out of 10 times you're going to get it wrong."

Making such calls often stems from conversations with business owners, observing how busy restaurants are, and other qualitative observations.

"We do use," says Mr Wan, "a combination of econometric models to gauge the sensitivity of say, private consumption to interest rate changes, but ultimately also use our intuition to gauge the direction and magnitude of growth."

INFOGRAPHIC: BTExplains - Singapore's economic indicators