Q1 growth at 2.5%; manufacturing still plays heavyweight role

Singapore

MANUFACTURING remains key as the Singapore economy grew 2.5 per cent in the first quarter of 2017 compared to a year ago, just a shade below market consensus, although economists are sanguine that it could be revised upwards in due course.

The latest reading is based on the first two months of 2017. The government's full-year forecast is 1-3 per cent growth for 2017.

The stellar year-on-year rebound in the last quarter of 2016, where a growth of 2.9 per cent was clocked, made the advance estimates of Q1 2017 growth pale in comparison.

Coming from a higher base of 12.3 per cent growth in Q4 2016, this translated to a contraction of 1.9 per cent on a quarter-on-quarter, annualised and seasonally-adjusted basis in Q1 2017, based on data released by the Ministry of Trade and Industry (MTI) on Thursday.

A poll of 23 private sector economists by the Monetary Authority of Singapore (MAS) in mid-February saw a median forecast of 2.6 per cent gross domestic product (GDP) growth year-on-year in the first quarter of 2017, and a 2.3 per cent growth for the whole year.

The manufacturing sector posted a 6.6 per cent growth year-on-year in the first quarter, moderating from the 11.5 per cent growth in the previous quarter, lifted by robust output expansions in the electronics and precision engineering clusters, overcoming output declines in the biomedical manufacturing, transport engineering and general manufacturing clusters.

On a quarter-on-quarter seasonally-adjusted annualised basis, the sector saw a pullback in growth in the first quarter, contracting 6.6 per cent following the 39.8 per cent surge in the preceding quarter, said MTI.

DBS Bank economist Irvin Seah said the main surprise came from the projected slower 6.6 per cent y-o-y expansion in the manufacturing sector, even though industrial output growth has averaged 8.2 per cent in the first two months of the quarter.

He said: "While this suggests that officials are expecting a decline in March industrial production, we reckon that there could be upside surprise to that. The pharmaceutical cluster has been on the down-cycle for the past two months and chance of a ramp-up in production in March is high. This could possibly be a positive swing factor especially if one assumes that the healthy run in electronics will persist."

OCBC Bank economist Selena Ling also noted the "patchy" growth in the rest of the sector, apart from the healthy domestic semiconductor and precision engineering industries.

The services producing industries saw a 1.5 per cent year-on-year uptick in the first quarter, up from 1 per cent growth in the previous quarter, underpinned by the wholesale & retail trade and transportation & storage sectors, which were in turn bolstered by a continued recovery in exports.

On a quarter-on-quarter basis, the services producing industries contracted at an annualised rate of 2.2 per cent, reversing an 8.4 per cent growth in the previous quarter.

Dr Tan said it may reflect the realities of the sector, which was affected by weaker wage growth and poorer consumer sentiment.

But Mr Seah said recent figures on financial market turnovers, loan growth, container throughputs and re-exports are all suggesting a fairly good showing in the key services sector. "Given that this sector accounts for two-thirds of the economy, upward revision to this figure would make a big difference to the final GDP number due next month."

Chua Hak Bin, Maybank Kim Eng economist, expects services sector growth to be upgraded when the final first-quarter GDP is released in May.

He said: "We think growth has also broadened to business services, besides financial services and wholesale & retail trade. Part of this is reflected in the rebound in property transactions (private residential sales more than doubled in Jan-Feb). Growth for healthcare and education services likely stayed resilient."

Meanwhile, the construction sector shrank 1.1 per cent in the first quarter versus a year ago, less severe compared to the 2.8 per cent decline in the previous quarter.

Said Ms Ling: "Construction saw its third straight quarter of on-year contraction due to weakness in private sector construction activities and another contraction in 2Q17 looks plausible."

But, on a quarter-on-quarter seasonally-adjusted annualised basis, the sector grew by 5.4 per cent, accelerating from the 0.8 per cent growth in the preceding quarter.

Said Mr Seah: "The main impetus is most likely coming from the slew of infrastructure projects that have been ongoing. Infrastructure projects will continue to remain the key driver of the sector in the coming quarters."

Mr Ng said the economic outlook for trade-dependent Singapore will "hinge on the magnitude and durability of the ongoing export recovery and whether it can filter into other components of growth, including consumption and investment".

He noted that while growth conditions improved, structural headwinds like slack in the labour market persist.

He said: "Unit labour costs (ULC) in Singapore have become elevated, exerting increased pressure on corporate profitability. Deflating ULCs to more reasonable levels will require an extended period of wage restraint and further retrenchment."

Thus, Mr Ng noted that overall, the interplay between these structural problems and the cyclical improvement in exports suggests only a modest improvement in growth.

While an improving global outlook made Mr Seah more optimistic, the turnaround thus far has been uneven and restricted to just a few clusters, he said. "The rest of the economy has yet to feel the uplift and the labour market has also remained soft."

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