Updated quick takes: Singapore growth fundamentals remain anaemic

SINGAPORE'S economy grew 1.8 per cent from a year ago in the first quarter of this year as manufacturing posted a better showing than predicted earlier while the services sector slipped.

Here are some economists' comments:

Selena Ling, head of treasury research & strategy, OCBC Bank:

"Worryingly, the services sector actually decelerated more than earlier estimated at +1.4 per cent year-on-year (yoy) (-5.9 per cent quarter-on-quarter seasonally adjusted annual rate (qoq saar), with transport and storage activities contracting for the second straight quarter by 0.4 per cent yoy. On a quarterly basis, momentum had cooled for the financial services (-15.2 per cent qoq saar), and wholesale & retail trade (-10.3 per cent qoq saar) in 1Q16.

"As anticipated, MTI kept its 2016 growth forecast unchanged at 1-3 per cent yoy, but tips NODX to shrink 3-5 per cent yoy, with the risk of China reforms sparking a further demand drop. At this juncture, we see little light at the end of the tunnel for regional demand and trade growth. NODX is likely to continue to drag its feet for the rest of 2016 as caution weighs on external consumption.

"Our full-year growth forecast remains at 1.8 per cent yoy, but the China/regional drag on the services sector is a key contributor to downside risks to the S'pore economy, especially if the Fed pushes ahead with policy normalization and that elevates market volatility in the near-term, apart from the somewhat receding Brexit referendum event risk in June."

DBS Group:

"While a contraction has been averted, growth remains weak, with the key drag coming from the services sector, which was supposedly the main engine of growth previously.

"More importantly, services account for about two-third of the economy. When the services sector turns, the economy follows. . . This essentially makes for significant downside risk to growth in the coming quarters.

"The only silver lining is that the goods producing industries - manufacturing and construction - have put up better than expected showings. . . In sequential terms, the sector surged by a whopping 23.3 per cent compared to the previous quarter. What was previously the key drag on the economy has now turned into the main thrust.

"That said, this rosy performance stems mainly from a stunning 22 per cent yoy surge in the biomedical cluster in the quarter. Without this boost, overall manufacturing sector would have contracted by 5.7 per cent. So quite literally, the manufacturing sector was given a strong jab in the arm from the biomedical cluster. That's 'drug effect'.

"However, the crux of the issue is that the biomedical cluster, especially the pharmaceutical industry, is the least integrated industry within the economy. With all its ups and downs, it has little impact on the rest of the economy except on the headline GDP growth. That is, the rest of the economy will hardly feel the effect of the surge in biomedical production - it only makes the headline GDP figure look better. Plainly, the economy would have contracted by about 2.5 per cent qoq saar if not for this 'drug effect'.

"In short, there is nothing to shout about over today's number. Growth at 0.2 per cent qoq saar is anaemic. The only saving grace is that the economy has averted a contraction but that is largely due to the boost from the biomedical cluster, which has little spin-off to the rest of the economy. Underlying fundamentals remain weak and the economy is in contraction if we stripped out the effects of the biomedical cluster."

Kit Wei Zheng, Citi economist:

"MTI keeps 2016 forecast of 1 to 3 per cent (Citi: 1.5 per cent), maintains cautious outlook, which is corroborated by lead indicators such as the 2.7 per cent quarter-on-quarter, seasonally-adjusted annualised rate (QoQ SAAR) drop in the Composite Leading Indicator, and continued contractionary business expectations for services in the next six months.

"Despite some tentative improvement in growth momentum in March and April, risks are skewed to the downside, especially from services, which saw the sharpest QoQ SAAR drop since the 2008-2009 recession. Should subsequent data disappointments raise downside risks to MAS' implicit expectations of 1.6 to 1.7 per cent growth for 2016, downward re-centring (of Singapore dollar nominal effective exchange rate band, or S$NEER) is possible."

Mizuho:

"As expected, growth momentum was higher than initial estimates with a Q1 GDP (SAAR) print at 0.2 per cent from zero per cent while on a year-on-year basis remained unchanged at 1.8 per cent.

"Main reason for the upward revision is that headwinds in the manufacturing sector were less acute than expected.

"That said, this is likely to prove temporary. Meanwhile, sluggish external demand will continue to be a drag on growth as well."

Prakash Sakpal, Asia economist, ING:

"There is no change to the official 1 to 3 per cent growth forecast for 2016. The authorities have warned that Q1 growth was due to a temporary ramp-up in pharmaceutical production in January and that the performance of the rest of manufacturing and the trade-related services sectors continued to be held down by sluggish external conditions.

"The Monetary Authority of Singapore's (MAS) surprise shift to a zero-percent S$NEER appreciation path in April is something usually associated with a recession, although that's not currently the case nor is it the baseline. Barring an adverse manufacturing shock we consider the MAS easing cycle over."