News analysis

Service sector key to a more decisive pickup

The manufacturing sector was the Singapore economy's most valuable player in the first six months of the year, powering ahead on the back of a pickup in global demand for electronics. But the outlook for manufacturing in this half of the year is less certain - economists are now looking to the service sector to step up.

Manufacturing, which makes up a fifth of the economy, grew 8 per cent in the second quarter from the same period last year, according to advance estimates released yesterday by the Ministry of Trade and Industry (MTI). While still a stellar performance, this was a slight step down from the 8.5 per cent pace in the preceding three months.

DBS senior economist Irvin Seah said the electronics rally "is showing some signs of lethargy of late". "Though a contraction is not expected in the near term... the semiconductor billings and shipments data are hinting at some sideways moves in the broader manufacturing output trend".

Other manufacturing segments, including transport engineering either have not picked up significantly or are still stuck in the doldrums. This means the service sector - which makes up two-thirds of the economy and employs the bulk of workers - will be key to a more decisive pickup in growth.

The sector expanded a modest 1.7 per cent in the second quarter, slightly faster than the 1.4 per cent growth in the previous quarter.

"Singapore continues to have a 'two-speed economy' and the fate of the domestic and external sectors continues to diverge," said HSBC economist Joseph Incalcaterra. "Specifically, remarkable manufacturing growth, particularly in semiconductors, is not passing through to the domestic services industries."

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said growth is broadening beyond trade-dependent manufacturing to services, "but the recovery in services is picking up a lot more slowly than we envisaged".

MTI's statement attributed second-quarter growth in services to the transportation and storage and business services segments, but Dr Chua and Ms Lee said the sector likely also benefited from a pickup in finance and insurance as well as wholesale and trade.

But others warned that the lacklustre labour market is likely to continue weighing on consumer spending, which means industries which depend on local demand are unlikely to experience a significant lift in the coming months.

"Singapore's labour market conditions remain weak as the current "growth surge" is not very broad-based," said UOB economist Francis Tan. "The question remains whether the uptick in the service sector can be sustained."

A version of this article appeared in the print edition of The Straits Times on July 15, 2017, with the headline 'Service sector key to a more decisive pickup'. Print Edition | Subscribe