Q2 grows only 2.1% as manufacturing slows

[SINGAPORE] It's no longer wait-and-see. Economists have started downgrading their full-year GDP growth forecasts, after disappointing Q2 numbers - dragged down by manufacturing's lacklustre performance - caught out the market yesterday.

And while hopes for a better second half are still alive, analysts say this is highly contingent on the state of Singapore's manufacturing sector. Most full-year GDP growth forecasts now hover around the 3.5 per cent mark, below 2013's 3.9 per cent expansion.

The economy performed worse than the market had expected in Q2, expanding 2.1 per cent compared to a year ago, according to advance GDP estimates released by the Ministry of Trade and Industry (MTI) yesterday morning.

The poorer-than-anticipated performance - caused by a broad-based slowdown in both manufacturing and services - caught analysts off-guard. In fact, all but one of the 23 private-sector economists polled by Bloomberg (prior to the data release) had expected Q2 GDP growth to be higher than 2.1 per cent.

On a seasonally adjusted quarter-on-quarter annualised basis, MTI said overall GDP contracted 0.8 per cent - a reversal from the annualised 1.6 per cent growth in the preceding quarter. The market had been expecting quarter-on-quarter growth of 2.4 per cent.

Expansion in the manufacturing sector moderated sharply to 0.2 per cent year-on-year, down from 9.9 per cent in Q1. MTI said the deceleration in growth was largely due to a contraction in electronics output and slower growth in transport engineering output.

While manufacturing was mostly to blame for the Q2's weak performance, there was also a slowdown in the services sector. Growth there eased to 2.8 per cent on a year-on-year basis, lower than the 3.9 per cent growth in Q1. This was largely due to slower expansion in the wholesale & retail trade and transportation & storage sectors.

The second quarter's shabby showing prompted at least five economists to downgrade their 2014 GDP forecasts. Those from Capital Economics and UOB lowered theirs to 3.5 per cent (the same as ANZ and Credit Suisse's estimates), from 4 per cent and 4.2 per cent, respectively.

But CIMB, Citi, and OCBC economists - who have all trimmed their full-year forecasts - think growth this year could come even lower than 3.5 per cent. CIMB is looking at a range of 2.5 per cent to 3.5 per cent (down from 3.8 per cent), while Citi and OCBC are anticipating 3.1 per cent and 3.3 per cent respectively (both down from 3.5 per cent).

Said UOB's Francis Tan of the downgrades: "I think (economists) were waiting to see how badly the electronics contraction would affect the overall economy in Q2, and also how much (growth in) the services sector would moderate ... The new figures have given us a good indication - it's clear that services growth is not so strong and in the next two quarters it may even be weaker."

Even though economists from ANZ and Mizuho expect firmer services growth going forward, DBS's Irvin Seah says there is a risk that the sector may continue to decelerate in the coming quarters, given the continued labour crunch and rising business costs. Barclays's Leong Wai Ho also believes the services industry will continue to cool, on the back of a subdued property market and a marked slowdown in tourism inflows.

Still, some economists remain optimistic on Singapore's economic outlook for the second half of this year, and caution against getting too bogged down with the latest dismal data. Said Mizuho economist Vishnu Varathan: "While Q2 GDP is mostly about manufacturing 'catch-down', one ought not to be caught up with this. Instead, the silver lining is that growth has probably bottomed. We see scope for full-year growth to catch up towards - but shy of - 4 per cent."

Both he and OCBC's Selena Ling say the pertinent question to ask for H2 2014 is whether manufacturing will continue to pull down the Republic's overall growth.

Said Ms Ling: "The critical determining factor for a potential technical recession in Q3 will be if the manufacturing sector bounces back from its subpar performance in Q2 or remains stagnant at Q2 output levels, albeit the latter remains a less likely scenario to us for now."

Even with Q2's disappointing figures, economists say no change in monetary policy is expected. But Citi's Kit Wei Zheng warned: "Should growth expectations persistently disappoint in H2 2014 or 2015, we would watch for potential knock- on effects on the jobs market and core inflation as a signpost for any shift in policy bias."

MTI will release updated GDP estimates for the second quarter in August, including performance by sectors, sources of growth, inflation, employment and productivity, in its Economic Survey of Singapore.