Stronger 2014 finish; outlook subdued

Singapore

A STRONGER-than-expected finish for the Singapore economy in 2014 is just that; growth still slowed from the year before, and the subdued outlook for 2015 remains unchanged.

The country's gross domestic product (GDP) beat even the most sanguine of forecasts to grow 2.1 per cent year on year in the fourth quarter of 2014, thanks to a smaller-than-anticipated contraction in the manufacturing sector.

This surpassed both the government's January estimate of 1.5 per cent growth, and the market's expectation that this could be raised slightly to 1.7 per cent.

The fourth quarter's performance brought full-year growth for 2014 to 2.9 per cent - slightly above the 2.8 per cent Prime Minister Lee Hsien Loong announced in his new year message, and matching private-sector economists' consensus forecast.

"The pertinent point about the upward revision is that optimism is backward-looking, whereas the subdued growth outlook for 2015 remains unchanged," said Mizuho economist Vishnu Varathan.

So despite the better-than-projected year-end performance, economists such as ANZ's Daniel Wilson and Glenn Maguire were keen to stress that "this does not change the trend in growth". Indeed, year-on-year quarterly and annual growth still slowed - to 2.1 per cent in Q4 from 2.8 per cent in Q3, and to 2.9 per cent in 2014 from 2013's revised growth rate of 4.4 per cent (previously 3.9 per cent).

The latest GDP growth figures were released by the Ministry of Trade and Industry (MTI) on Tuesday. The government maintained its 2015 growth forecast at a "modest pace" of 2-4 per cent, noting that "the global economic outlook has softened in recent months, with growth in 2015 expected to come in only marginally better than in 2014".

Manufacturing recorded the weakest growth among the sectors, and pulled overall Q4 GDP growth down by 0.3 percentage point. Weighed down by the transport engineering and electronics clusters, the manufacturing sector contracted 1.3 per cent y-o-y - a far cry from Q3's 1.7 per cent growth. Still, manufacturing's Q4 performance was better than the official advance estimate of a larger contraction of 2 per cent.

Although the services sector grew 3.1 per cent y-o-y in Q4, this was a slight drop from Q3's 3.3 per cent expansion. With a 10.3 per cent expansion in Q4, the finance & insurance sector outperformed all other services producing industries, singlehandedly contributing 1.2 percentage points to Q4 GDP growth. Except for transportation & storage - which contracted 0.4 per cent - all services sectors saw growth in Q4.

Non-oil domestic exports (NODX), also released on Tuesday, beat forecasts as well. NODX grew 4.3 per cent y-o-y in January, boosted by electronics and pharmaceutical exports. But Citi economist Kit Wei Zheng cautioned that "the strong January data should be interpreted with caution given front-loading ahead of Lunar New Year", while OCBC economist Selena Ling said that although exports were off to a good start in 2015, they were "likely skewed by seasonal effects".

Economists from CIMB and HSBC also noted that labour productivity growth remains elusive. It declined 1.5 per cent y-o-y in Q4 - the third consecutive quarter of decline, and a worsening from Q3's 0.9 per cent contraction.

For the whole of 2014, labour productivity declined 0.8 per cent - compared to 2013's 0.3 per cent growth. With Singapore's low unemployment rate of 2 per cent, the rise in unit labour cost accelerated to 3.5 per cent last year, up from 2.4 per cent in 2013.

"The decline in overall productivity can be attributed not only to productivity falling across most sectors, but also a rise in the employment share of less productive, domestically oriented sectors," said MTI.

While lower oil prices have generally had a positive effect on the economy - they have lowered utilities and fuel-related costs for businesses - MTI economics division director Yong Yik Wei warned that the marine and offshore sector could face some obstacles if the slump in oil prices is sustained beyond the short term, since orders for oil-related equipment could fall.

MTI permanent secretary Ow Foong Pheng again flagged the "challenging" global economic environment, noting that externally oriented sectors such as manufacturing and wholesale trade are likely to face headwinds going forward. "Domestically, the labour market is expected to remain tight, with low unemployment and rising vacancy rates. As a result, labour-intensive sectors such as construction, retail and food services may see their growth weighed down by labour constraints. Nonetheless, other domestically-oriented sectors such as business services are expected to remain resilient."

As for monetary policy implications, most economists seem to think that the central bank would refrain from easing further in April, since Tuesday's better-than-expected data lowers the odds of another slope reduction at its next review.

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