The Singapore economy ended 2017 on a high note, turning in a better-than-expected report card in the last three months of the year, thanks to a trade-driven pickup in manufacturing.
But economists say the pace of expansion is likely to slow this year as global demand tapers off.
The economy expanded 3.1 per cent in the fourth quarter of 2017 compared with the same period a year earlier, according to Ministry of Trade and Industry advance estimates out yesterday.
This was higher than economists' expectations of 2.6 per cent growth, but came in below the previous quarter's 5.4 per cent expansion.
The latest numbers come after Prime Minister Lee Hsien Loong said in his New Year message on Sunday that the Singapore economy expanded 3.5 per cent for the whole of 2017 - more than double the initial forecasts.
Manufacturing, which makes up a fifth of the economy, was once again the top performer in the fourth quarter.
The sector, which has been benefiting from strong global demand for electronics, expanded 6.2 per cent year on year, supported by robust growth in the electronic and precision engineering clusters.
"Growth in the manufacturing sector could ease going forward as global economic conditions normalise amid a lack of new smartphone product launches, as well as softer external demand on the back of tighter global monetary conditions," said DBS senior economist Irvin Seah.
The service sector, which makes up two-thirds of the economy, grew 3 per cent in the fourth quarter. The sector is expected to contribute more to growth this year "and pick up the anticipated slack in manufacturing", said Mr Seah.
But the construction sector continued to lag, shrinking 8.5 per cent year on year and extending a 7.7 per cent decline in the previous quarter. The contraction was largely due to weak private-sector building activity.
The outlook for the year ahead is more stable but risks remain, economists said.
Slowing growth and investment in China could weigh on prospects for Singapore, said UOB economist Francis Tan.
Closer to home, a prospective tax hike could dampen growth and push up inflation. "We think that it is probable that the goods and services tax could be hiked to 8 per cent, from the current 7 per cent, with effect from April 1," said Mr Tan, who is tipping economic growth of 2.5 per cent for this year.
Government forecasters expect the economy to expand between 1.5 per cent and 3.5 per cent this year.
While this pickup in growth has been driving a concurrent rise in labour productivity, it is still too early to herald the success of Singapore's economic restructuring efforts, economists say.
Manpower Minister Lim Swee Say has said labour productivity grew about 3 per cent for the whole of 2017 - accounting for almost all of the economic growth for last year. This would be the highest productivity growth rate since 2010.
However, this pickup is probably not sustainable, said Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye. "Such surges are typically seen in the early growth upswing, but dissipate as capacity tightens," they noted.
"Tight foreign labour restrictions will become more of a constraint on growth this year, particularly for services, and some targeted relaxation may be necessary to sustain growth."