Q1 GDP growth pips estimates, but analysts remain cautious

Q1 GDP growth pips estimates, but analysts remain cautious
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Published: 8:00 AM, May 25, 2016
Updated: 11:08 PM, May 25, 2016

SINGAPORE — The stuttering manufacturing sector provided an unexpected lift for Singapore’s economy in the first quarter, as official data on Wednesday (May 25) showed the economy performed better during the period than initially estimated. However, concerns are starting to mount over the services sector, even as it continues to prop up the economy.

Gross domestic product (GDP) between January and March expanded 0.2 per cent on a quarter-on-quarter seasonally-adjusted annualised basis, final estimates from the Ministry of Trade and Industry (MTI) showed on Wednesday. The performance was better than the zero per cent estimated in the advanced readings released by MTI last month, but much slower than the 6.2 per cent growth logged in the final quarter of last year. 

On a year-on-year basis, growth was 1.8 per cent in the first quarter, unchanged from the previous quarter, and in line with estimates.

Although the MTI noted in its report that the global economic outlook has weakened since early 2016, it maintained its GDP growth forecast for Singapore at 1 to 3 per cent for this year, “barring the full materialisation of downside risks”. 

UOB and OCBC, meanwhile, have also maintained their forecasts for the year at 2.7 per cent and 1.8 per cent, respectively.

“Although Singapore’s manufacturing sector is not out of the doldrums yet, today’s numbers may point to the start of a recovery in the sector,”  said UOB economist Francis Tan. “We remain optimistic that there could be some pickup in external sectors in the second half of 2016 as the economic conditions in the United States continue on an improving path, while some basis effects from the low base in 2015 will provide some support for growth.” 

Ms Selena Ling, head of treasury research and strategy at OCBC Bank, added that while the bank has maintained its full-year growth forecast for Singapore, several downside risks are present and it sees little light at the end of the tunnel for regional demand and trade growth. 

“Our full-year growth forecast remains, but the China/regional drag on the services sector is a key contributor to downside risks to the Singapore economy, especially if the Fed pushes ahead with policy normalisation and that elevates market volatility in the near term, apart from the somewhat receding Brexit referendum event risk in June,” she said.

The manufacturing sector, which contributes to about a fifth of the economy, jumped a revised 23.3 per cent on a quarter-on-quarter seasonally-adjusted annualised basis. This reverses the 4.9 per cent contraction in the fourth quarter of last year thanks to a surge in pharmaceutical production. The final print was also stronger than the 18.2 per cent growth initially estimated. 

On a year-on-year basis, however, the manufacturing sector contracted 1 per cent, following the 6.7 per cent decline in the previous quarter. Growth was dragged down primarily by the transport engineering and precision engineering clusters.

The analysts also noted with concern that the GDP breakdown shows the services industry contracted more than initially estimated by 5.9 per cent from the previous three months. This is the sector’s first quarterly contraction since early 2015, largely because of a pullback in wholesale and retail trade as well as finance and insurance services. 

The initial estimates released last month had projected a 3.8 per cent quarter-on-quarter contraction, following a 7.7 per cent expansion in the preceding quarter. On a year-on-year basis, services expanded by 1.4 per cent, moderating from the 2.8 per cent growth in the previous quarter. 

“While the economy was grappling with and adjusting to the slowdown in the externally-oriented manufacturing sector over the last five quarters, Singapore’s services sector was the main pillar supporting growth,” said Mr Tan. “However, the first quarter numbers showed that the negative spillover effects to the services sector from a contractionary manufacturing sector may have begun.” 

The construction sector expanded at a seasonally-adjusted annualised rate of 10.5 per cent, accelerating from the 6 per cent growth in the preceding quarter. It expanded by 6.2 per cent compared with a year ago, improving from the 4.9 per cent growth in the previous quarter, supported by both public and private sector construction activities.