Outlook cloudy as Q2 growth slows sharply

SINGAPORE — Hit by a double whammy of weak external demand and a tight domestic labour market, Singapore’s economy grew at a much slower pace in the second quarter than forecast and economists warn that the near-term outlook remains cloudy in the face of slowing Chinese growth.

Gross domestic product expanded by 1.7 per cent in the April-to-June quarter from the corresponding period last year, advance estimates from the Ministry of Trade and Industry (MTI) showed today (July 15), slowing sharply from the 2.8 per cent growth in the preceding quarter. 

The reading was also well below the 2.6 per cent expansion forecast by economists in a Bloomberg poll and the 2.7 per cent growth predicted by professional forecasters surveyed by the Monetary Authority of Singapore (MAS) last month.

The dismal performance of the manufacturing sector, which accounts for about a fifth of the economy, continued to be the biggest drag on growth. The sector contracted 4 per cent in the second quarter year-on-year, deepening from the 2.7 per cent decline in the preceding quarter, mostly due to a fall in output in the biomedical manufacturing and transport engineering clusters, and as demand from China remained sluggish.

“External demand remains weak, particularly in China, which is the elephant in the room. Singapore’s non-oil domestic exports (NODX) to China is down by 5 per cent year-on-year in the year-to-date in 2015.

We think shipments will continue to decline into the beginning of the third quarter. As Singapore’s largest trading partner both in terms of NODX and overall exports, China’s economy will bear significantly on growth of Singapore’s external sectors,” said HSBC economist Joseph Incalcaterra.

China’s second-quarter growth is expected to have slowed to 6.8 per cent from 7 per cent in the first three months, a Bloomberg poll of economists showed ahead of data due tomorrow.

Economists are also pinning their hopes on demand from the United States, the largest economy in the world, to drive factory activity. “Manufacturing remains the weakest link … Absent a stronger recovery in the US, the outlook for Singapore manufacturing remains dim,” said DBS economist Irvin Seah.

On a sequential basis, manufacturing slumped a massive 14 per cent in the second quarter from the previous three months, leading to overall GDP shrinking 4.6 per cent over the same period. And while manufacturing activity remained in the doldrums, the services sector provided no offsetting lift as a labour crunch continued to squeeze businesses.

Services-producing industries grew 3 per cent in the second quarter from the year-ago period, slowing from the 4.2 per cent in the preceding quarter, mostly due to slower expansion in wholesale and retail trade as well as business services, and a contraction in the transportation and storage sector. Services-producing industries contracted 2.6 per cent in the second quarter from the previous three months, when it grew 3.8 per cent.

The construction sector expanded by 2.7 per cent year-on-year in the second quarter, improving from the 2.1 per cent growth in the previous quarter, supported by a stronger expansion in public sector building activity. However, it shrank 0.2 per cent from the previous three months.

“Singapore’s domestic labour crunch is a key impediment to growth, particularly for the services sector. The manpower curbs associated with the restructuring have impeded companies’ ability to grow in the near term,” said Mr Seah. “The tightening in the foreign worker Dependency Ratio Ceilings in past years has restricted employers from hiring more low-wage foreign workers unless they hire more locals. With the local labour supply pool nearing its peak, companies are unable to hire more even if they are willing to do so,” he added.

Some MPs had expressed concerns in Parliament on Monday over the labour situation, asking  if the Government could be “overdoing” the curbs on foreign manpower. Manpower Minister Lim Swee Say replied that Singapore had not overdone its foreign manpower curbs, saying it had instead slowed down the intake “and yet manage and assess the transition in a way that would enable more companies, especially the small and medium enterprises, to adapt and grow.”

Credit Suisse economist Michael Wan said today: “While our base case is still for some bounce in employment, continued weakness in the second-quarter labour market numbers could bring about some form of policy easing, either through deferring foreign worker levy hikes further, or tweaking some of the property macro-prudential measures.”