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Outlook still tepid for Singapore growth

Uncertainty persists over US and China growth and global monetary policy moves
Thursday, June 18, 2015 - 05:50
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The Singapore economy may have performed better than expected in Q1, but a rocky start to the second quarter and uncertainty over the US and China's growth and global central banks' moves have kept expectations for full-year growth conservative.

THE Singapore economy may have performed better than expected in Q1, but a rocky start to the second quarter and uncertainty over the US and China's growth and global central banks' moves have kept expectations for full-year growth conservative.

Professional forecasters continue to expect GDP growth in the range of 2 per cent to 2.9 per cent this year, the lower half of the government's official 2 per cent to 4 per cent growth forecast, the Monetary Authority of Singapore's (MAS) quarterly survey has found.

The median 2.7 per cent growth forecast of the 23 private-sector economists and analysts who responded was a tad lower than the 2.8 per cent forecast from the survey in March.

Since the survey was conducted in late May, tension over the lack of a deal between Greece and its creditors has spiked. But unless an unprecedented Greek exit from the eurozone materialises, economists do not expect market jitters to alter Singapore's growth trajectory much.

Barclays economist Leong Wai Ho said: "Financial markets are not reacting to Greek tantrums like they used to. We are getting desensitised to the scares. As long as this is the case, the effect on Singapore or the Singapore dollar will be small."

Instead, the strength of the US economy's recovery, China's slowdown and global central banks' actions - particularly the anticipated rate hikes in the US - will be the more crucial factors to watch.

DBS economist Irvin Seah said: "Alignment of global monetary policy directions and economic fundamentals is key. Policy actions by the Federal Reserve, European Central Bank and People's Bank of China have to be in line with global economic conditions. Or else you can only expect more volatility and uncertainty ahead, which will not be conducive for a small and open economy such as Singapore's."

He identifies the pace of deceleration in China as the largest risk. "The weakening fundamentals in China and the bull run in its equity markets is disconcerting," he said.

This, alongside a slower-than-expected recovery in the US, are the reasons the market has downgraded its expectations for the manufacturing sector. Manufacturing is now expected to grow just 0.5 per cent over the full year, down from the 1.8 per cent forecast from March's survey.

Weak industrial production figures for April imply that tepid global trade conditions have hit orders across sectors, said HSBC economist Joseph Incalcaterra. And the trade figures for May released on Wednesday did not bring much cheer either, with non-oil domestic exports (NODX) to US, Europe and China all falling in sequential terms. This suggests that manufacturing will remain the economy's weakness in Q2, he said.

Indeed, MAS's survey shows that forecasters expect manufacturing to shrink another 0.3 per cent in Q2, following a sharper-than-expected 2.7 per cent decline in Q1. Despite this, Q1's gross domestic product (GDP) growth of 2.6 per cent overshot the 2 per cent predicted by forecasters in the March report, as the construction and finance and insurance sectors outperformed expectations.

In the latest survey, full-year growth estimates for the construction sector have been bumped up to a median of 3.3 per cent from 2 per cent a quarter ago, but those for the finance and insurance sector were dialled back slightly. It is now expected to grow 7 per cent this year, down from 7.5 per cent a quarter ago.

Mr Seah said: "Risk in the financial services sector remains in place against the backdrop of Fed rate hike fears."

Barclays' Mr Leong, whose 2015 GDP growth forecast of 3.4 per cent was the highest of those polled by MAS, said his more bullish prediction hinges on external demand turning stronger in Q3. He said: "The lift is likely to be more pronounced in the US, where job growth, housing starts and ISM (Institute of Supply Management) new orders are indicating a healthy resurgence. For us, this means some more upside in NODX and in IP, which could also herald a pickup in trade services such as commerce, logistics and transport."

Reflecting how inflation has been negative for the first four months of this year, forecasters lowered their estimates for 2015 headline inflation to 0 per cent, from 0.1 per cent a quarter ago. Zero inflation is also the mid-point of the official forecast range of -0.5 per cent to 0.5 per cent inflation. The median forecast for MAS's core inflation remained unchanged at 1 per cent - also the midpoint of the official 0.5 per cent to 1.5 per cent forecast range.

While inflation has been negative, there are no concerns yet about persistently falling prices that characterise a deflationary environment. But Mr Seah noted that core inflation also slipped - to 0.4 per cent in April. That decline merits a close watch, as the rising risks of negative core inflation may require a policy response, he said.

READ MORE: Non-oil domestic exports down 0.2% - worse than expected

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