Services to replace electronics in growth limelight

Singapore

STAR performer electronics may have dazzled over the past year, but it could be the services sector's time to shine in the next six months, according to two quarterly surveys on business sentiment.

The electronics cluster - a key driver of growth in Singapore in 2017 - showed the greatest pessimism compared to the quarter before, even as both services and manufacturing registered overall gains in business sentiment, based on figures from the Economic Development Board and the Department of Statistics (Singstat).

The services sector in particular showed a significant leap in business optimism, with more expecting conditions to improve compared to those which foresee a deterioration.

This resulted in an overall net weighted balance of 9 per cent of businesses which see an improved outlook, higher than the 5 per cent seen a quarter ago.

The manufacturing sector also turned a notch more positive, with an overall net weighted balance of 5 per cent which expect an improvement, up from 4 per cent previously.

But OCBC economist Selena Ling said that beneath the modest improvement in the headline data, the manufacturing engine is actually cooling.

This was because electronics was found to be the most pessimistic, with a net weighted balance of 11 per cent which expect a less favourable operating environment. This was down from the net weighted balance of 7 per cent showing optimism in the last quarter.

Most of the segments within electronics anticipate business prospects to be seasonally softer over the next six months.

CIMB Private Banking economist Song Seng Wun said that the decline in business sentiment in electronics is not unexpected.

For one, the busiest period is always the second half of the year, he noted. In contrast, the first half of the year is considered off-peak period for manufacturing.

"This is when they take a breather after the year-end execution of orders for the Christmas period," he explained.

Secondly, the dip in business sentiment could also be due to greater caution by firms about the coming year as electronics growth is expected to taper to a "more sustainable pace," said Mr Song.

"You can't get the 30-50 per cent growth [in electronics output] we have seen in the last year - it's not possible to sustain," said Mr Song.

The precision engineering cluster is the most optimistic about the next six months, with a net weighted balance of 22 per cent of firms expecting improved business conditions ahead - a significant pickup from the 10 per cent found in the previous quarter.

The chemicals, biomedical and transport engineering clusters also registered improved business sentiment, with net weighted balances of 17, 12 and 7 per cent respectively.

However, sentiment among the general manufacturing firms was pessimistic, weighed down largely by weak domestic construction activities.

Business sentiment within manufacturing may be uneven, but confidence in the services sector - which makes up about two-thirds of the economy - has soared.

All industries within services, except for the real estate industry, foresee an improvement in business outlook for the next six months.

Firms in the food and beverage services, retail trade, and accommodation industries expect the year-end festivities to positively impact business, resulting in net weighted balances of 34 per cent, 19 per cent and 11 per cent respectively.

Those in the financial and insurance industry, especially banks and insurance companies, also expect a pickup in business conditions, with 20 per cent which foresee an improvement.

The real estate industry was the only laggard, with a net weighted balance of 5 per cent which see a weaker outlook. Within the industry, firms engaged in the leasing of commercial premises expect weaker demand for their services.

Mr Song said that the improvement in sentiment across services is a result of the trickle down effect, when export sectors which have done well benefit those related to the domestic economy.

He also registered surprise that real estate has remained pessimistic, with the latest en bloc fever and positive property sales data.

"I would expect real estate to turn around. The external environment is looking positive even though there are risks." Mr Song said growth overseas should filter down to Singapore and its services sector - which has lagged headline GDP (gross domestic product) growth. This should continue to see a pick-up with more industries adding to growth, he added.

OCBC's Ms Ling said that the broadening growth base should provide "greater resilience" to Singapore's growth outlook in 2018 as the services sector picks up speed, even if it is not ready to take the driver's seat yet.

"Our forecast is for 2018 GDP growth to be around the 2-4 per cent range with more even sectoral growth prospects," she said.