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Global headwinds may slow Singapore's growth

MTI flags downside risks to 2015 forecast, even as Q3 GDP surprises with 2.8% expansion
Wednesday, November 26, 2014 - 05:50
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A litany of external risks could throw the official 2-4 per cent growth forecast for 2015 off-course, even as the government announced better-than-expected Q3 GDP numbers and projected economic growth of "around 3 per cent" for 2014.

Singapore

A LITANY of external risks could throw the official 2-4 per cent growth forecast for 2015 off-course, even as the government announced better-than-expected Q3 GDP numbers and projected economic growth of "around 3 per cent" for 2014. (see infographic)

The Ministry of Trade and Industry (MTI) said on Tuesday morning that Q3 GDP grew a stronger 2.8 per cent year-on-year, thanks to further expansion in both the manufacturing and services sectors. This beat not only the initial flash estimate of 2.4 per cent growth, but also the market's expectation that this could be raised slightly to 2.5 per cent.

But any cheer from Q3's upside surprise was dampened by MTI's cautious outlook for the rest of this year and into 2015, several economists pointed out.

"The message here is really don't be too upbeat. MTI is saying, here's a better number (for Q3), but hold your horses because there's a whole laundry list of external risks," noted Mizuho economist Vishnu Varathan.

MTI said GDP growth for the first three quarters stands at 3.3 per cent year-on-year, but it expects growth to "ease slightly" for the rest of 2014 in line with a projected slowdown in the global economy. It expects Q4 growth at 2.2 per cent year-on-year.

And although MTI anticipates global growth to "pick up modestly" in 2015, it qualified that the pace of recovery is likely to remain uneven across different economies. Growth in the US is expected to improve on the back of domestic demand, while key Asean economies like Malaysia and Indonesia are projected to stay resilient, supported by healthy investment growth. But the picture elsewhere is less sanguine.

MTI expects the pace of recovery in the eurozone to remain weak, since ongoing tensions involving Russia and Ukraine have dampened business and consumer sentiment, and sluggish labour market conditions continue to weigh on growth in the region. In Asia, economic expansion in Japan and China is seen being capped - because of fiscal consolidation efforts in the former, and sluggish real estate activities in the latter.

On top of this, MTI permanent secretary Ow Foong Pheng said that further downside risks remain: "In the eurozone, there are concerns that its economy will fall into a deflationary spiral ... In the US there are uncertainties over when, and the pace at which the Federal Reserve will raise the Fed funds rate. An unexpected tightening of monetary policy conditions would weigh significantly on the US's financial markets and business sentiment ... In China, there is a risk of a sharp correction in the real estate market, which could have severe negative spill-over effects on construction and real estate investment activities."

Because the government's 2015 growth forecast does not account for these risks - "barring the materialisation of downside risks highlighted, the Singapore economy is expected to grow by 2-4 per cent in 2015," said Mrs Ow - growth next year could come in lower than projected.

While CIMB economist Song Seng Wun described MTI's position as "extremely cautious," Bank of America Merrill Lynch economist Chua Hak Bin said: "Overall, they're a tad bearish and that's aligned with our assessment as well. Growth is going to continue to struggle on, because these external risks add to our domestic constraints. On balance, there are more downside risks than upside ones."

As for concerns over the eventual rise in interest rates, MAS chief economist and assistant managing director Edward Robinson said: "At that point in time, it would also mark the restoration of growth in the US onto a sustainable path, which would be net positive for global growth and therefore supportive of economic activity in small open economies including those in the region."

After seasonal adjustments and on an annualised basis, the Singapore economy grew 3.1 per cent in Q3 - better than the flash estimate of a 1.2 per cent expansion. The market had been expecting a revision here too, to 1.5 per cent.

Thanks to growth in the biomedical manufacturing and chemicals clusters, the manufacturing sector expanded 1.9 per cent year-on-year, up from 1.5 per cent in Q2. Growth in the services sector accelerated to 3.4 per cent year-on-year in Q3, up from 2.6 per cent the quarter before. Expansion was driven by the finance & insurance sector, which surged to grow 10.5 per cent in Q3 - nearly double the Q2 pace of 5.5 per cent.

While MTI thinks externally-oriented sectors such as manufacturing, wholesale trade, and finance & insurance are likely to provide support to growth next year, it reiterated that labour-intensive domestically-oriented sectors (including retail and food services) may see their growth weighed down by labour constraints.

* Labour costs up again, productivity dips further

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