Economy chugs at stable pace, on track for 2017 growth of 2-3%

Singapore

Economists maintain their forecasts and see no impetus for changes to the existing neutral monetary policy stance adopted by the Ministry of Trade and Industry (MTI), but are reticent about the latest figures.

The overall economy chugged along at a stable pace - at the same rate as in the previous quarter - growing at a slower than expected 2.5 per cent year-on-year in Q2 2017, MTI said on Friday.

The latest reading, based on two months of data, came below market consensus of 2.7 per cent. The first-quarter growth rate was revised down to 2.5 per cent from the earlier 2.7 per cent.

On a quarter-on-quarter annualised basis, MTI said overall GDP expanded by a seasonally adjusted 0.4 per cent - a reversal from the 1.9 per cent contraction in the preceding quarter. This meant that the Singapore economy escaped a technical recession as widely anticipated, said OCBC Bank economist Selena Ling.

The main drag came from the construction sector, which has contracted for four straight quarters as both private and public sector construction activities were weak, she noted. Notably, the construction sector's Q1 growth rate was revised downwards significantly to -6.1 per cent, from an earlier -1.4 per cent.

Still, there are silver linings amid the lacklustre growth, said Mizuho Bank economist Vishnu Varathan. The services producing industries continued to improve, albeit modestly, clocking 1.7 per cent year-on-year growth, quickening from previous quarter's revised 1.4 per cent growth. The manufacturing sector, driven by electronics and precision engineering clusters, grew 8 per cent year-on-year in Q2, slower than the upward revised growth of 8.5 per cent in the previous quarter. With this backdrop, some economists expect the government to narrow its GDP growth forecast to 2-3 per cent for 2017, from the current 1-3 per cent, when fuller estimates of Q2 GDP are released in the middle of August. Citibank economist Kit Wei Zheng said: "Lacklustre services and construction growth does not yet suggest a strong broadening of growth drivers as yet. Still, if the export recovery persists as per our expectations, we would watch for firmer signs of recovery in domestic demand and outside of manufacturing, and an eventual reduction in job market slack."

Economists too expect GDP to moderate in the second half of 2017 following a strong first half. The base also becomes more difficult especially in Q4 2017, noted Credit Suisse economist Michael Wan and UOB Bank economist Francis Tan. Mr Tan said labour market conditions remain weak as the current "growth surge" is not very broad-based and labour indicators are lagging. This should continue to weigh on domestic demand, noted Mr Wan.

Mr Wan also said the strongest tailwinds to exports are likely fading while the pace of fiscal support is likely to slow further. He said: "We will likely see a slower pace of government spending, while the water tariff hike implemented in July could start to weigh on growth over the rest of 2H (second half)."

Economists largely maintain their GDP growth forecasts for the year, so long as inflation remains as expected. They feel the government will maintain the current neutral monetary policy stance at its October meeting. But Maybank-Kim Eng economists Chua Hak Bin and Lee Ju Ye maintained their view that the Monetary Authority of Singapore will "likely tighten its policy to a 'mild appreciation bias' in its October meeting".

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