Services 'not strong enough' to mitigate Singapore economy's slowdown

Singapore

WITH manufacturing caught in the doldrums, Singapore's services sector may seem like a lifeline for optimists hoping for economic growth.

But it is unlikely that services - which fed nearly 70 per cent of last year's nominal gross domestic product (GDP) - could pull enough weight to shelter the Republic from the ongoing pangs of a slowdown, economists told The Business Times.

Though export-oriented factories fared poorest amid a global trade war, services are also vulnerable in Singapore's open economy, analysts said.

The Republic's services exports were worth S$246.2 billion in 2018, led by transport. The sector's export value outstripped the S$182.1 billion in non-oil domestic exports that same year.

Services growth came in at a flat 1.2 per cent in the second quarter, according to flash data, after year-on-year growth in the first quarter was lowered from an initial 1.5 per cent.

"We think the risk is that the flash services growth... may see a slight downgrade," Maybank Kim Eng senior economist Chua Hak Bin told BT.

DBS senior economist Irvin Seah has called the industry performance disappointing, writing in a recent report that services and construction had been expected "to hold up, and to cushion the slide in manufacturing".

"Further weakness in the service sector would not only weigh down on growth but also hit the labour market squarely," Mr Seah said.

Dr Chua added: "The manufacturing and trade recession has broadened out and is also hurting services growth. Sluggish services growth is no longer confined to trade-related services, but is also seen in domestic-oriented services sectors."

Since the latest GDP numbers are only preliminary, no detailed breakdown of the sector's performance is available until the final second-quarter print comes out next month. But the data from recent quarters has pinned services growth on finance and insurance, information and communications, and business services.

Meanwhile, growth in accommodation and food services has slowed, and wholesale and retail trade started to decline late last year. Retail sales also fell for the fourth straight month in May.

Some bright spots have fanned hopes: Standard Chartered analysts noted in a July 16 report that "we expect the 'modern services' sector to provide support for growth".

"In particular, ongoing digitisation efforts should drive the information and communications sector, which should have contributed positively in (the first half)," the report said.

Besides infocomm, the Ministry of Trade and Industry (MTI) in May identified a promising outlook in other services industries - such as education, health and social services, where "growth is expected to be resilient, supported by the ongoing ramp-up of operations in healthcare facilities".

But Maybank Kim Eng economist Lee Ju Ye noted that "other services", which encompasses this segment, makes up barely a tenth of the GDP.

Vishnu Varathan, head of economics and strategy at Mizuho Bank, also told BT in an e-mail that digitalisation will not be a magic driver for growth.

"The arithmetic growth addition is not disputed," he remarked. "Businesses cannot afford to be left behind... But this is a start, not the end.

"And that structural shift is not meant to be a sufficient response to global trade disruption."

DBS' Mr Seah added: "Though domestic services segment such as IT services and business services may provide some support, the GDP shares of these industries are relatively smaller, and hence may not be enough to offset the (receding) tide."

All that gloom is even before any spillover from the technical recession in manufacturing, into adjacent services industries such as transport and storage, where growth is cooling.

Finance and insurance growth has been coming down since a peak early last year, to notch 3.2 per cent expansion in the first quarter. Business services growth, driven by professional services and real estate, also eased, according to an MTI report in May.

Dr Chua added that modern services such as financial and business services can be hit by external swings too - "and most of that is already showing some signs of slowing".

Private consumption - which the Monetary Authority of Singapore's chief economist said in February should keep "a steady pace of growth" this year, with support from the labour market - picked up to 4.2 per cent growth in the first three months, after easing for a whole year. Singapore workers also saw real wage growth of 4.2 per cent in 2018, or nominal wage growth of 4.6 per cent, as per Manpower Ministry statistics.

But Rob Carnell, head of Asia-Pacific research at ING, warned: "An embedded expectation for rising nominal wages annually is at odds with what is becoming the global norm for flat wages as a trade-off for job security, and transitioning to the new world reality may weigh on spending patterns."

In the end, as Mr Varathan of Mizuho put it: "Domestic services are a key buffer to blunt the slowdown, not an engine to boost growth in defiance of external headwinds.

"In other words, it is at best a partial relief, but far from a panacea."