Q3 growth better than expected; economists upgrade 2018 forecasts

2.6% year-on-year figure beats forecast of 2.4%; growth in first 3 quarters of 3.8% best 9-month performance since 2013


SINGAPORE'S economy turned in a better-than-expected report card for the third quarter, which led several economists to upgrade their full-year growth forecasts.

Even with trade tensions and emerging market uncertainties casting a pall on the outlook, the economy is still on track to grow at a steady but more subdued clip for the rest of the year and 2019, said economists.

Singapore's economy grew 2.6 per cent year on year in Q3, down from 4.1 per cent in Q2, and 4.6 per cent in Q1, according to advance estimates released by the Ministry of Trade and Industry on Friday morning.

This makes Q3 the weakest print this year, but it still managed to beat economist expectations of a 2.4 per cent expansion. For the first three quarters of 2018, the Singapore economy clocked growth of 3.8 per cent - the best 9-month performance since 2013. The manufacturing sector was still the main growth driver in Q3, but its momentum has slowed considerably as earlier anticipated, hit by base effects, a fading electronics cycle, and trade war concerns.

Manufacturing expanded by 4.5 per cent in Q3, down from the 10.6 per cent growth in the previous quarter. This was supported mainly by output expansions in the electronics, biomedical manufacturing and transport engineering clusters.

DBS economist Irvin Seah was upbeat about the sector: "Unlike earlier concerns regarding the impact of the trade war, the manufacturing sector has remained fairly resilient. Though the pace has moderated, overall manufacturing activity remains healthy, particularly if we consider the arithmetic drag from the high base last year."

The services producing industries held steady, expanding by 2.9 per cent in Q3 - the same pace of growth as in the previous quarter. This mostly came on the back of a strong performance from the finance & insurance, business services and wholesale & retail trade sectors.

But even with its solid showing, not all economists are convinced about the outlook of the services sector, which makes up two-thirds of the economy.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said: "We think that trade-related services such as wholesale trade and transportation & storage will likely come in stronger in Q3, as firms frontload and ship their goods prior to the tariffs."

They believe the US-China trade war will start dampening trade-related services in 2019 and possibly even the fourth quarter of 2018, while recent property measures will "likely hurt" business services and property transactions growth in the coming quarters.

Finally, the beleaguered construction sector continued to languish, contracting by 3.1 per cent year on year in Q3, extending a 4.2 per cent decline in the previous quarter. The sector was weighed down by the weakness in public sector construction.

In spite of the relatively weak headline growth in Q3, it still came as an upside surprise for economists, with many of them revising their full-year forecasts upwards for 2018. In a nod to the economy's resilience, the Monetary Authority of Singapore (MAS) announced separately on Friday that it will slightly increase the slope of the Singdollar nominal effective exchange rate (S$NEER) policy band, in the second consecutive tightening at its half-yearly monetary policy review.

OCBC economist Selena Ling said: "Singapore's 2019 growth prognosis is far from downbeat, notwithstanding that trade frictions between major economies and related uncertainties could weigh more discernibly on global economic growth." She added that domestic demand has strengthened further and is underpinned by an improving labour market and an expected faster wage growth pace in 2018- 2019.

OCBC upgraded its 2018 full-year forecast from 3 per cent to 3.3 per cent after the results. DBS economist Irvin Seah also raised full-year estimates from 3 per cent to 3.4 per cent.

He said: "Although the trade disputes between the US and China could indirectly affect Singapore in the near term, it could also bring about opportunities in the medium to longer term."

For the full-year, economic growth is on track to come in within the upper half of the official 2.5-3.5 per cent range this year and moderate slightly in 2019.

A fuller report of Singapore's third quarter economic performance will be released in November.