SINGAPORE’S economy narrowly missed analysts’ forecasts in the final quarter of 2018, according to advance estimates from the Ministry of Trade and Industry (MTI) on Wednesday.
Fourth-quarter gross domestic product (GDP) growth came in at 2.2 per cent year on year, slightly lower than the 2.3 per cent expansion clocked in the previous quarter, in a slowdown that DBS economist Irvin Seah called “broad-based” amid stronger external headwinds.
The latest flash estimate could take Singapore’s full-year GDP growth to a tentative 3.3 per cent, as disclosed by Prime Minister Lee Hsien Loong in a New Year message on Monday. Policymakers had previously pointed to growth of 3.0 to 3.5 per cent.
If the government forecast holds, the economy’s report card for 2018 would show growth moderating from 2017, when GDP grew by 3.6 per cent to S$447.3 billion.
Economists polled by Bloomberg had guided for 2.5 per cent growth in the last three months of 2018, and 3.3 per cent for the full year.
Mizuho economist Vishnu Varathan called the flash estimate disappointing, but told The Business Times that the number is likely to be revised upwards and remains consistent with full-year growth forecasts.
“Q4 growth momentum does not throw a wrench in the projected 2 per cent to 3 per cent growth for 2019, even if downside risks remain significant,” he added.
Economic growth in the fourth quarter was lifted by the manufacturing sector, where the pace of expansion picked up to 5.5 per cent from 3.7 per cent in the previous quarter.
Higher biomedical manufacturing and electronics production made up for declines in precision engineering output, said the MTI.
But, on a seasonally adjusted quarterly basis, the manufacturing sector still shrank by 8.7 per cent - its first such contraction in a year - against 3.1 per cent growth in the third quarter.
Selena Ling, head of treasury research and strategy at OCBC Bank, said on Wednesday that manufacturing’s weaker performance “suggested that the softening global demand environment was starting to weigh into the year-end and the front-loading activities seen earlier to pre-empt the US-China tariffs were starting to fade as well”.
Still, UOB senior economist Alvin Liew, who also pegged front-loading as a factor behind the manufacturing spike, cautioned that “the subsequent payback in Q2 is likely to be magnified and translate to a weaker manufacturing growth outlook in 2019”. The payback will come in the second quarter of 2019 if threatened higher US tariffs set to come into effect in March are not averted.
Besides the potential for a manufacturing slowdown in 2019 - from both US-China trade developments and cooling Chinese growth - Mr Liew said that the house also remains cautious about a high base effect and a global electronics slowdown, “which could eventually take a more material toll on the electronics cluster this year”.
DBS's Mr Seah said a key factor would be sluggish growth in China.
Non-oil domestic exports to the Chinese market has fallen in recent months, while the Caixin/Markit Manufacturing Purchasing Managers’ Index, a private survey, showed Chinese factory activity shrinking for the first time in two years in December.
“The trade dilution impact of the trade war has started to bite,” said Mr Seah.
The services sector slowed its growth to 1.9 per cent in the fourth quarter - from 2.6 per cent in the three months prior - while supported by finance and insurance, business services, and information and communications sector. Quarter-on-quarter, services expanded by 3.7 per cent, down from 5.3 per cent growth in the third quarter (see amendment note).
Citi economists Kit Wei Zheng and Ang Kai Wei wrote that the continued expansion in the services sector “may indicate broadening growth”, in line with official projections of a shift from trade-driven growth to modern services.
Meanwhile, the construction sector saw a contraction of 2.2 per cent - compared with the third quarter’s 2.5 per cent decline - which the MTI said came largely on softer public-sector works.
Standard Chartered economists wrote last week that the quarter’s growth was “likely capped by unfavourable base effects” in both manufacturing and services.
They added that externally driven economic activity such as industrial production, while cooling down, is still outpacing growth in domestic sectors.
OCBC’s Ms Ling also said that “the external economic environment remains fraught”, no thanks to uncertainty over issues such as the US-China trade war, financial markets, and business and consumer confidence.
On a quarter-on-quarter, seasonally adjusted basis, Singapore’s GDP growth eased to 1.6 per cent in the fourth quarter, from 3.5 per cent growth previously.
The MTI’s advance estimates - an early indication of fourth-quarter growth - were based mainly on data from October and November 2018, with updated figures to come in February 2019.
Meanwhile, Singapore’s official forecast for 2019 economic growth is between 1.5 and 3.5 per cent, although Mr Varathan from Mizuho said that the economy is “not necessarily set for a hard landing”.
Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye noted that “risks are tilted towards the downside on the back of the US-China trade war and tightening monetary conditions”, and expect the US-China trade war to expand to non-tariff measures such as export controls and investment restrictions.
Citing both slowing economic growth and a retreat in US Federal Reserve tightening, ING economists Nicholas Mapa and Prakash Sakpal wrote that there was a strong case for the Monetary Authority of Singapore (MAS) to leave monetary policy unchanged in 2019.
And Citi’s Mr Kit and Mr Ang, who anticipate further monetary tightening from the MAS, warned that downside risks may have increased, with core inflation likely to fall below forecast on events such as an oil price slump and local electricity market liberalisation.
The MAS moved to a "modest and gradual" appreciation of the Singdollar in April 2018, for the first time in six years, and tightened monetary policy again at its meeting in October 2018.
“So long as the bigger picture is one of gradual slowdown... the MAS will not beat a hasty retreat on policy,” said Mr Varathan.
But Ms Ling added that the Budget statement on Feb 18 could still “incorporate a slightly looser fiscal stance, if need be, to accommodate any accentuated downside growth risks”.
Dr Chua and Ms Lee, who have cautioned that slower GDP growth will mean a weaker labour market, also expect the Budget to provide for supportive economic policy.
Amendment note: An earlier version of this article incorrectly stated the quarter-on-quarter changes in services growth.