Singapore Q2 growth below expectations at 3.8%

But economists largely sticking to their full-year estimates despite rising trade tensions and recent property cooling moves


SINGAPORE'S economy expanded 3.8 per cent year-on-year in the second quarter of 2018, lower than economist expectations of 4.1 per cent and down from the first quarter's 4.3 per cent growth, according to Ministry of Trade and Industry (MTI) advance estimates on Friday.

Sequential momentum also slowed. On a quarter-on-quarter seasonally adjusted annualised rate (q-o-q saar) basis, the economy grew at a slower pace of 1 per cent in the second quarter, compared to 1.5 per cent in the preceding quarter.

But economists are largely sticking to their full-year growth estimates, despite noting downside risks amid escalating US-China trade tensions and recent property cooling measures.

Manufacturing expansion remained the key driver of GDP growth, but slowed to 8.6 per cent, down from 9.7 per cent the previous quarter.

All clusters in the sector saw expansion, with the electronics and biomedical manufacturing clusters contributing most to the sector's growth.

But quarter-to-quarter, manufacturing shrank a marginal 0.1 per cent, a reversal from the previous quarter's 21.3 per cent growth.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye expect that manufacturing growth has likely peaked, as signalled by lower PMI (Purchasing Managers' Index) figures and weak electronic exports.

They expect manufacturing growth to ease into the low single-digits in the second half of the year, as global electronics demand tapers and businesses cut capital expenditure and production in the face of US-China trade friction.

JPMorgan analyst Benjamin Shatil, however, said: "Survey data suggests that new manufacturing orders remain high, and a firming regional tech cycle should provide some modest support to output through the next couple of months. "That said, a disruptive escalation in trade tensions could challenge this forecast," he acknowledged.

Services grew 3.4 per cent, down from 4 per cent the previous quarter. This was supported primarily by the finance and insurance, and wholesale and retail trade sectors.

Noting that quarter-to-quarter services growth rebounded to 2.5 per cent from a 1.4 per cent contraction in the previous quarter, OCBC economist Selena Ling said: "Increasingly, services growth is expected to serve as the bulwark for growth going into 2H18."

Dr Chua and Ms Lee expect both services and overall GDP performance to be upgraded when the final estimates are out in mid-August, noting that "MTI's advance GDP estimate tends to be more conservative".

The construction sector remained in contraction but at an easing rate, declining 4.4 per cent after the previous quarter's 5.2 per cent fall.

This was due mainly to continued weakness in private sector construction. The sector has seen year-on-year contraction each quarter since the third quarter of 2016. Quarter-to-quarter, construction also shrank 14.6 per cent in the second quarter, reversing the 0.9 per cent growth in the preceding quarter.

BMI Research expects the construction sector's performance to remain poor due to weakness in the residential segment.

"New residential construction activity is likely to be capped amid a high number of vacant residential units and new property market cooling measures that were adopted by the government as at July 6," they said. The measures included higher additional buyer's stamp duty and tighter loan-to-value limits.

Despite second-quarter growth coming in below expectations, most economists are sticking to their full-year forecasts.

RHB Research is maintaining its forecast of 3 per cent "in line with the moderation in exports and the shift towards a healthier and more moderate semiconductor cycle this year".

Maybank's Dr Chua and Ms Lee have kept to their 3.5 per cent forecast, adding that impact from the trade war may not yet be felt in the third quarter. They expect the Monetary Authority of Singapore (MAS) to maintain its "slight appreciation bias" for the Singapore dollar at October's policy meeting.

ANZ Research noted downside risks to their above-consensus 4 per cent full-year forecast, but expect monetary policy to be further tightened in October, given that growth in the first half of 2018 "is still well above the upper bound of the MAS's full-year forecast range of 2.5-3.5 per cent".

Also expecting additional tightening in October - "in the absence of further trade tensions" - is Deutsche Bank, although it has a below-consensus prediction of 2.6 per cent growth in 2018.

One outlier is BMI Research, which has revised its full-year forecast in light of the second-quarter figures - but upwards, to 3.3 per cent from 3 per cent previously.

Nonetheless, it expects growth to continue cooling, saying: "We believe that the economy will continue to face headwinds from the ongoing global trade conflict, a weak construction sector, and rising interest rates."

The big question, said OCBC's Ms Ling, is where the US-China trade war is headed. If the additional US$200 billion tariff list materialises, "there could be further dampening effects on business and consumer sentiment into 3Q18", she said.

While retaining a full-year forecast of 3 per cent, she noted a downside risk of around 0.3 percentage point.