Singapore's economy sharply missed expectations in the second quarter, even as analysts have been cutting their forecasts for growth.
Gross domestic product (GDP) rose 1.7 per cent, well below a forecast for a 2.4 per cent rise from a Reuters poll and below the 2.8 per cent advance in the previous quarter, according to flash estiates from the Ministry of Trade and Industry on Tuesday.
On a quarter-on-quarter basis, the economy contracted a sharp 4.6 per cent, well off a Reuters poll forecast for a 0.8 per cent increase and a reversal from the first quarter's 4.2 per cent expansion.
DBS Group Research: Outlook for 2015 "remains cloudy", cuts forecast for 2016 GDP
Advance GDP growth estimates for the second quarter of 2015 surprised on the downside.
This is a synchronised decline with all three key sectors - manufacturing, construction and services - reporting sequential contraction.
However, while the decline in 2Q15 is more severe than expected, the interesting thing to note is that first quarter GDP figure has been revised significantly upward, essentially offsetting the bulk of the drop in Q2. First quarter GDP was lifted to 4.2 per cent QoQ, up from 3.2 per cent previously.
In line with expectations, manufacturing remains the weakest link. Output probably fell by 4.0 per cent YoY in Q2. Sequentially, that's a massive 14 per cent drop. A confluence of factors are weighing on the sector. Exports to the top 3 markets - the US, Eurozone and China - may have bottomed but a pick-up remain elusive.
Domestically, the labour crunch and rise in production costs owing to restructuring have compounded growth concerns. Absent a stronger recovery in the US, the outlook for Singapore manufacturing remains dim.
The domestic labour crunch is a key impediment to growth, particularly for the service sector. The manpower curbs associated with the restructuring have impeded companies' ability to grow in the near-term. Tightening in the foreign worker Dependency Ratio Ceilings (DRCs) in past years has restricted employers from hiring more low-wage foreign workers unless they hire more locals. With the local labour supply pool nearing its peak, companies are unable to hire more even if they are willing to do so. This is a self-imposed supply-side constraint that has put a heavy lid on growth.
That probably explained the official projection of a contraction of 2.6 per cent QoQ (3.0 per cent YoY) for the services sector. That said, services sector growth figures tend to get underestimated in every preliminary estimates. Expect this figure to be revised upward, thereby lifting the Q2 overall GDP growth number next month when the actual outcome is announced.
Construction sector growth recorded an expansion of 2.7 per cent YoY. On surface, things may be holding up. But the marginal sequential decline of 0.2 per cent QoQ may suggest the cooling down in residential construction and manpower curbs weight down on growth prospects despite a healthy pipeline of infrastructure projects.
The outlook for the year remains cloudy given the risks in the global economy and the divergence in monetary policy directions. Domestic restructuring and the resulting labour shortage will weigh on growth. Beyond what we now expect will be the slowest growth in 6 years (2.4 per cent in 2015), we have also cut our forecast for 2016 growth to 2.9 per cent, from 3.5 per cent previously.
Nomura Group: Downside risks up but expects better growth in second half-year
The government's advance estimates show that GDP growth slowed in Q2 to 1.7 per cent YoY from a revised 2.8 per cent in Q1 (from 2.6 per cent), missing expectations. This implies a sharp sequential contraction of 4.6 per cent QoQ in Q2, reversing the 4.2 per cent expansion in Q1.
As we expected, the manufacturing sector was the biggest drag, declining by 4.0 per cent y-o-y after a 2.7 per cent drop in Q1. This was driven by biomedical and transport engineering clusters and therefore could be temporary. Excluding the volatile biomedical segment, we believe manufacturing sector growth may have improved.
Although we are maintaining our full-year 2015 GDP forecast of 2.7 per cent, we believe the Q2 print increases the downside risks. Advance estimates may yet be revised up once the June data are taken into account - which may show some improvement, partly boosted by the Southeast Asian Games held in Singapore.
We continue to expect better growth in the second half-year as US demand improves and sequential growth solidifies in China. This could better allow firms to pass rising wage pressures on to consumer prices.
Against this backdrop, we maintain our base case in which the Monetary Authority of Singapore (MAS) keeps its policy stance (on the Singapore dollar exchange rate) at the next policy announcement (in October).