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Q2 growth slows, but is still above forecasts

Hopes are high for a better second half, as global recovery picks up

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The Singapore economy grew 2.4 per cent in the second quarter of this year - above the government's July estimate of 2.1 per cent, but more slowly than Q1's expansion of 4.8 per cent - PHOTO: SPH

[SINGAPORE] The Singapore economy grew 2.4 per cent in the second quarter of this year - above the government's July estimate of 2.1 per cent, but more slowly than Q1's expansion of 4.8 per cent.

While the manufacturing sector was largely to blame for the last quarter's slowdown, growth in the services and construction sectors also moderated during the quarter.

Still, with the global economy making more sure-footed strides towards a recovery, hopes are high for a better second half in this year - although manpower constraints could weigh some labour-intensive segments down.

Given a surprise turnaround in June's manufacturing output, economists had widely expected that the Q2 Gross Domestic Product (GDP) growth would overshoot the flash estimate. The 21 private-sector economists polled by Bloomberg ahead of yesterday morning's release of the growth data by the Ministry of Trade and Industry (MTI) had a median Q2 growth forecast of 2.3 per cent - 0.1 of a percentage point shy of the actual figure.

This had seemed likely, after Prime Minister Lee Hsien Loong announced last Friday that Singapore had grown 3.5 per cent year-on-year for the first half of 2014.

He also narrowed Singapore's full-year growth forecast to 2.5-3.5 per cent, from an earlier range of 2-4 per cent.

MTI's economics division director Yong Yik Wei said the tighter forecast implies that the government expects sequential improvements in the second half of the year, on the back of a "modest pick-up" in the global economy.

After seasonal adjustments, the GDP grew an annualised 0.1 per cent quarter-on-quarter in Q2. This beat both the flash estimate - a contraction of 0.8 per cent - as well as the consensus market forecast for a decline of 0.3 per cent.

But this was still a moderation from the 1.8 per cent quarter-on-quarter growth in Q1, which had been revised upwards from 1.6 per cent.

Dragged down by a contraction in electronics output and slower growth in transport engineering production, the manufacturing sector grew 1.5 per cent year on year in Q2. This was a sharp slowdown from the 9.9 per cent expansion in Q1, but higher than the advance estimate of 0.2 per cent.

Growth in the services sector also moderated to 2.6 per cent from 3.9 per cent in Q1, a notch lower than the earlier estimate of 2.8 per cent. The easing was broad-based across the sector, and was led by transportation & storage, wholesale & retail trade, and accommodation & food services.

MTI said that in the next six months, in tandem with improving global economic conditions, externally-oriented sectors such as finance & insurance and wholesale trade are likely to support growth.

The ministry added that domestically-oriented sectors - including business services and information & communications - are expected to "remain resilient" in H2 2014.

"However, growth in some labour-intensive segments such as retail and food services may be weighed down by labour constraints."

While most private-sector economists' 2014 GDP growth projections fall within the government's new 2.5-3.5 per cent forecast range, that of Mizuho's Vishnu Varathan, for example, are more sanguine.

"(The narrowed band) implicitly suggests that there will be no acceleration in growth into the second half of the year - a rather conservative view by our reckoning. But perhaps this view prices in unknowns from supply-side constraints amid restructuring, geopolitical risks and some headwinds from expectations of US rate hikes."

His reckoning is that GDP growth will come in at 3.8 per cent in 2014.

Indeed, MTI permanent secretary Ow Foong Pheng said the government's forecast range "factors in the downside risks of the global economy", including the chance that tensions in oil-producing regions could escalate and the impact of tighter regulations in China's shadow banking sector.

Unit labour costs and unit business costs of manufacturing accelerated during the second quarter, and labour productivity returned to contraction mode (-1.3 per cent from Q1's 0.7 per cent).

Finance & insurance (1.6 per cent) and manufacturing (1.1 per cent) were the only sectors with productivity improvements. The sectors with the sharpest declines in productivity were accommodation & food services (-3.2 per cent), business services (-2.7 per cent) and construction (-2 per cent).

But Mrs Ow cautioned against getting carried away by quarter-to-quarter changes in productivity numbers: "More importantly, we need to look at what's happening sector by sector. Are companies picking up the (government's) schemes, are they moving up the value chain? Because quarter-to-quarter, depending on GDP figures, it will fluctuate."

As core inflation looks set to creep higher, economists from Citi, Mizuho, and UOB believe that the central bank will keep to its stance of a "modest and gradual" appreciation of the Singapore dollar Nominal Effective Exchange Rate (S$NEER) come the next monetary policy meeting in October.