Flash Notes-Singapore: 2Q GDP Growth Disappoints

Singapore’s 2Q 2015 GDP (advance estimates) grew 1.7% y/y (-4.6% q/q SAAR), disappointing consensus estimates ofa 2.6% y/y growth rate, and a tad lower than the revised 1Q GDP growth of 2.8% y/y (from 2.6% y/y).

    We had been penciling a 2Q GDP growth forecast of a 1.8% y/y as Apr-May manufacturing activities remained weakand would drag on economic growth in a significant way. From the Trade Ministry’s report today, it showed that themanufacturing sector had contracted 4.0% y/y (-14.0% q/q SAAR) in 2Q, the third consecutive quarter of on-year declinein Singapore’s largest GDP sector (around 19% share).

    Overall manufacturing sector weakness was due to the fall in output from the biomedical manufacturing and transportengineering clusters. Latest high frequency data showed that the biomedical manufacturing sector had declined forfour consecutive months due to weak pharmaceuticals production. Weighing on that, the transport engineering clusteralso experienced nearly one full consecutive year of contraction (except for a breather in Sep 2014) since June 2014.

    The construction sector grew 2.7% y/y (-0.2% q/q SAAR), an improvement from 1Q’s growth rate of 2.1% y/y, due tostronger public construction sector activities. However, the services sector’s growth of 3.0% y/y (-2.6% q/q SAAR) wassignificantly lower than the 4.2% y/y growth rate registered in the previous quarter. This was due to weaker growth inthe wholesale & retail trade, business services, and the transport & storage sectors.

    As we enter the second half of 2015, the external environment continues to be uncertain with recent concerns centeringback on Greece and thus the resurgence of political-economic uncertainties in the Eurozone. The drag from China’seconomic slowdown continues and current deflationary pressures around the world may hinder Singapore’s secondhalf growth prospects. The bright spot ahead will be the continued path of economic recovery in the US, which willhave some positive demand spillovers to the non-oil tradeables sector in Singapore. That said, whether this will offsetthe slower demand from China and the Eurozone remains unclear.

    On the domestic front, both the goods and services sectors continue to face the challenges from the on-going economicrestructuring amid tight labour market conditions. Economy-wide labour productivity remained stagnated as since thelabour productivity reform started in 2011, labour productivity had not grown at all (based on average of quarterly y/ygrowth rates). Taking into account of the economic growth performance in 1H 2015 as well as the increase in uncertaintiesof the trade sector, we downgrade our 2015 GDP growth forecast to 2.5%, from 2.9% earlier.