Manufacturing drives economy up 4.9%

[SINGAPORE] Singapore's manufacturing sector continued to power economic growth in Q1, building on earlier industrial strength first seen in the quarter before - a reflection of the strengthening recovery in the global economy. The government is also maintaining its 2014 gross domestic product (GDP) growth forecast at 2-4 per cent.

The Republic's GDP grew 4.9 per cent year-on-year in the first quarter of 2014, driven by a 9.8 per cent expansion in manufacturing. This helped to offset slower growth in the services and construction sectors.

Overall GDP growth for the quarter in year-on-year terms came in below the government's April flash estimate of 5.1 per cent, in part due to a rebasing of national accounts from base year 2005 to 2010.

But in annualised quarter-on-quarter terms after seasonal adjustments, the economy expanded 2.3 per cent in Q1 - above the 0.1 per cent advance estimate based largely on data for January and February.

"The apparent divergence in the year-on-year (down) and quarter-on-quarter (up) revisions to the flash estimates is mostly a quirk of rebasing GDP to 2010 prices from 2005 prices, resulting in a consequently higher base, dampening the year-on-year growth measure," explained Mizuho economist Vishnu Varathan.

The 18 market economists polled by Bloomberg prior to the Ministry of Trade and Industry's (MTI) data release had a median Q1 growth forecast of 5.5 per cent. Their projection would have implied Q1 growth of a similar pace to that seen in Q4 2013 - initially said to have been 5.5 per cent.

After the Department of Statistics' regular rebasing exercise to compile real GDP growth on 2010 instead of 2005 prices, Q4 growth was adjusted to 4.9 per cent.

As a result, instead of the moderation that flash estimates showed, Singapore achieved a similar rate of growth in Q1 2014 as it had in Q4 2013.

The strong expansion in the industrial sector was largely thanks to a sharp rebound in the biomedical manufacturing cluster, as well as stronger growth in the chemicals and transport engineering clusters. On a quarter-on-quarter basis, the sector grew at an annualised rate of 11.9 per cent, following the 10.4 per cent growth in the previous quarter.

Manufacturing's strength helped to counteract the slowdown in the pace of growth for both the services and construction sectors. Services growth moderated to 4.4 per cent year-on-year in Q1 - from 5.5 per cent in Q4 - due to weaker performance from the wholesale trade, air transport, finance and insurance, real estate, and hotel services segments.

Construction also slowed to expand 6.7 per cent year-on-year, from Q4's 7.3 per cent, due to weak private sector construction activities.

Singapore's finance and insurance sector expanded by 5.4 per cent on a year-on-year basis, slower than the 10.5 per cent growth in the previous quarter. MTI said that this was largely due to a slowdown in the sentiment-sensitive cluster.

But some economists think that the recent acceleration in manufacturing growth will not be sustainable going forward. DBS economist Irvin Seah believes that industrial performance will ease off in the second quarter, with the electronics cluster acting as the key drag.

"(The sector) will still be in expansion mode, but the pace of growth will definitely moderate . . . Recent indicators like the PMI (purchasing managers' index) and the semiconducter book-to-bill ratio are all pointing to slower demand ahead," said Mr Seah.

Supported by a sustained recovery in the US and eurozone, the government expects the global economy to "continue to improve modestly" in 2014.

"However, there are always downside risks," said MTI permanent secretary Ow Foong Pheng, citing a quicker-than-expected normalisation of US monetary policy, and the rebalancing of China's economy as potential risks to Singapore's growth prospects this year.

MTI also continued to caution that the ongoing manpower crunch is expected to weigh on growth in some labour-intensive sectors.

While the government maintained its 2-4 per cent 2014 GDP growth forecast, most private-sector economists' projections fall at or beyond the upper end of this range.