Miserable Q2 S'pore GDP prompts shaving of full-year forecasts

Singapore

TO say the Singapore economy disappointed in the second quarter would be an understatement. It performed even worse than already-tepid expectations, contracting 4.6 per cent on a seasonally adjusted, quarter-on-quarter annualised basis.

The pullback was broad-based; all three sectors - manufacturing, services and construction - posted sequential declines over the previous quarter for the first time since Q3 2001.

In year-on-year terms, Q2 gross domestic product (GDP) disappointed as well, growing just 1.7 per cent due to a contraction in the manufacturing sector, said the Ministry of Trade and Industry (MTI) in its advance estimates on Tuesday morning. This was slower than the 2.8 per cent growth in Q1 and below the market's expectation of a 2.4 per cent expansion; it was also the slowest pace of growth since Q3 2012.

The uninspiring numbers prompted several banks to revise down their full-year GDP growth forecasts; private-sector economists now say the government is likely to narrow its 2015 growth projection from 2-4 per cent to 2-3 per cent, or even lower it to between 1.5 and 2.5 per cent.

Bank of America Merrill Lynch (BOAML) economist Chua Hak Bin told The Business Times: "The economy has just stagnated. If you look at it in quarter-on-quarter terms, whatever gains were gotten in the first quarter were surrendered in Q2."

Indeed, most economists were surprised by Q2's numbers; of the 19 polled by Bloomberg before the data release, only four had forecast Q2 GDP to come in at below 2 per cent.

A large part of the slowdown came from a 4 per cent year-on-year contraction in the manufacturing sector - down from Q1's 2.7 per cent decline. This was attributed to a fall in output in the biomedical manufacturing and transport engineering clusters.

On a quarter-on-quarter basis, the sector contracted sharply at an annualised rate of 14 per cent, reversing from the 0.4 per cent expansion in the preceding quarter.

Growth in the services sector also eased to 3 per cent year-on-year from Q1's 4.2 per cent. The moderation was mostly due to the slower expansion in the wholesale & retail trade and business services sectors, as well as a contraction in the transportation & storage sector.

In quarter-on-quarter terms, services declined at an annualised rate of 2.6 per cent; it had expanded by 3.8 per cent the quarter before.

Supported by stronger expansion in public-sector construction activities, the construction sector expanded 2.7 per cent year-on-year, up from Q1's 2.1 per cent growth. On a quarter-on-quarter basis, however, the sector contracted at an annualised rate of 0.2 per cent - a far cry from the 8.3 per cent expansion in Q1.

Following Tuesday's Q2 flash estimates, at least three banks cut their full-year GDP growth forecasts. Three more (Credit Suisse, ING, and HSBC) acknowledged downside risks to theirs. Barclays and Citi lowered their projections to 2 per cent (from 3.4 per cent and 2.3 per cent respectively); UOB shaved its estimate to 2.5 per cent from 2.9 per cent.

Economists agree that the latest data raises the likelihood of a Monetary Authority of Singapore loosening in October, although Citi's Kit Wei Zheng said that things were "not yet at tipping point". "A H2 pick-up could still put year-end GDP within the earlier forecast range. Also, MAS may have already implicitly downshifted growth expectations towards 2.5 per cent in April, and even small downside surprises that prompt modest downgrades to 1.5 to 2.5 per cent may not be enough to trigger easing."

While economists from ANZ, Barclays, Nomura and OCBC think that a better second half could materialise - helped in part by a US recovery and a stronger domestic-services sector - others are not so convinced.

UOB economists Francis Tan and Jimmy Koh, along with BOAML's Dr Chua, flagged uncertainties in the external environment, including slower demand from China and its recent equities rout and Greece's euro woes.

DBS economist Irvin Seah also warned of the "very real risk" that a technical recession - defined as two quarters of negative quarter-on-quarter contraction - could set in. "If external conditions do not improve or in fact deteriorate further, it's very likely that Singapore could dip into a technical recession," he said, adding that if that happened, MAS would have to tweak its current weak appreciation bias.