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Quick takes: Downside risks to Singapore's economic growth piling up

A Development Bank of Singapore (DBS) logo in pictured in the backdrop of the central business district in Singapore.

SINGAPORE'S Ministry of Trade and Industry (MTI) announced on Tuesday that the Singapore economy grew by 1.8 per cent on a year-on-year basis in the second quarter, slower than the 2.8 per cent growth in the previous quarter.

Here are some comments:

Morgan Stanley Research:

"In our view, the weak incoming growth trajectory reflects an economy that remains under pressure from both cyclical and structural factors.''

"Indeed, the lower global GDP growth trend on the back of diverging DM-EM dynamics has posed downward pressure on an economy that has typically been a high-beta global proxy. Meanwhile, the unwinding of the leverage cycle also poses further headwinds. Credit growth has decelerated, leading to collateral impact seen in the property market and construction sector."

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"Indeed, although we don't think leverage excesses would lead to a cathartic boom-bust cycle, given the absence of a big negative external shock and/or a hard landing in the property market and the presence of large current account surpluses, the economy would need to delever to recharge for the next growth cycle."

"Yet, the combination of rising real interest rates and deflation means that leverage to GDP ratio will likely continue to stay high, and the economy will not be able to reach escape velocity to grow out of this leverage drag. Additionally, greying demographics alongside the streamlining of immigration policies also spells further headwinds for potential GDP growth."

DBS Group Research:

"In line with our expectation, upward revision in the services sector has helped to offset the slump in the manufacturing sector."

"Manufacturing sector has indeed been the weakest link. Overall manufacturing growth in the second quarter now reads -4.9 per cent year-on-year against the advance estimate of -4.0 per cent.''

"Beyond the rising external headwinds and global uncertainties, Singapore manufacturers are also struggling with the double whammy of higher business costs and domestic labour crunch."

"For example, electronics exports in Singapore have been stuck in the doldrums for the past three years. This has allowed emerging electronics manufacturers such as Vietnam to catch up. In fact, Vietnam will overtake Singapore to become the fifth largest electronics exporter in Asia within the next two years. Unless Singapore can find "greener pastures" in manufacturing, otherwise, this sector could be in for a steady structural decline."

"External headwinds have remained strong. Absent a recovery in the global economy, manufacturing performance will continue to languish while the services sector struggles with the domestic labour constraints. Full year GDP growth for 2015 is expected to register 2.4 per cent. But downside risks are certainly piling up. Against the backdrop of the second quarter GDP contraction, risk of a technical recession, albeit still low, should not be discounted.

Credit Suisse:

"Fiscal policy holds the key to growth improvement in H2. Partly due to the weak Q2 GDP print, we see downside risks to our full year 2015 GDP estimate of 3.2 per cent (consensus: 2.6 per cent).''

"Today's GDP print is unlikely, in and of itself, to move the needle on the central bank's exchange rate policy yet. As we have been highlighting, the biggest risk to policy comes from stability in the labour market, in our view...This is important too in light of General elections likely to be called sometime later this year.''

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