External factors create uncertainty for S'pore's H2

Singapore

ADVANCE estimates of Singapore's economic growth in the second quarter of the year proved to be slightly encouraging. The estimates released by the Ministry of Trade and Industry (MTI) on Thursday recorded a 2.2 per cent growth year on year.

This is in line with analysts' expectations and is marginally higher than the revised 2.1 per cent growth in the previous quarter.

However, economists are cautious going into the third quarter of the year. Some have downgraded their growth forecast for the full year, citing external factors like China's waning growth and instability in the EU post-"Brexit" that could dampen Singapore's growth in the second half of 2016.

UOB economist Francis Tan said: "With the growth numbers from the first half of 2016 in and the potential headwinds surrounding uncertainties post-Brexit, weak EU growth prospects and the South China Sea situation, we revised our 2016 GDP growth forecast downward to 2.2 per cent from 2.7 per cent earlier."

OCBC's Barnabas Gan said the ongoing global issues, including the sustained Chinese economic deceleration and economic uncertainty in Europe post-Brexit, should persist into H2 2016.

China remains Singapore's top destination for non-oil domestic exports taking 13.6 per cent of the share, followed by Europe at 12.6 per cent. Therefore, according to Mr Gan, the "speed bumps" in the respective economies could prove to a significant hindrance to Singapore's economy, let alone its export-dependent manufacturing sector.

However, OCBC retains its year- end GDP forecast at 1.8 per cent.

Brexit scares were alluded to by Deputy Prime Minister Tharman Shamugaratnam during Parliament on Monday. When asked about his take on Brexit, Mr Tharman noted that while Brexit is not expected to result in a significant reduction in Singapore's growth in the next few years, there could be a "more major impact" if events in Europe coincide with a sharp slowdown in China and the US.

On a quarter-on-quarter seasonally adjusted annualised basis, the economy expanded by 0.8 per cent, faster than the 0.2 per cent growth in the preceding quarter.

Better results came from the manufacturing sector, which managed its first year-on-year growth since Q3 2014, recording 0.8 per cent. According to MTI, growth in this sector was led primarily by an increase in the output of biomedical manufacturing and electronics clusters.

However, the construction sector recorded a 2.7 per cent growth on a year-on-year basis in the second quarter, easing from the 4.5 per cent growth recorded in the previous quarter. The moderation in growth was largely due to a slowdown in private- sector construction activities, said MTI.

A large part of the construction sector is supported by public infrastructural projects. According to ANZ economist Ng Weiwen, the recent surge in government construction contracts can help mitigate the slowing private sector construction activity. However, this is unlikely to sustain an acceleration in growth.

The services producing sector was stable at 1.7 per cent, underpinned by growth in the wholesale and retail trade and transportation and storage sectors.

UOB's Mr Tan noted that this was the slowest growth rate since the four quarters (Q4 2008 to Q3 2009) of year-on-year contraction registered during the global financial crisis.

Mr Tan said: "This is particularly worrying as the services sector contributes 68 per cent of Singapore's GDP and accounts for nearly 72 per cent of total employment. The continued slowdown in the services sector will weigh more heavily on overall GDP growth, stagnate wages and could push unemployment rates higher."

Despite the less than optimistic view of Singapore's economic growth, economists believe the Monetary Authority of Singapore (MAS) will keep their monetary stance of "zero appreciation of the SGD NEER" unchanged in their upcoming policy meeting in October 2016 as core inflation has been on an upward trend in recent months.

According to Citibank economist Kit Zheng Wei, economic stagnation in H1 2016 is largely in line with the MAS's expectations. "Growth in the second quarter was slightly higher than what we suspect is MAS's implicit assumption of 1.6-1.7 per cent growth for 2016," he said. However, the data released on Thursday does not provide a conclusive case for downward re-centreing in October. Nonetheless, with elevated uncertainties and multiple headwinds post-Brexit, Q3 data may prove more critical for the MAS call, said Mr Kit.

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