Q1 growth of 2.6% surprises on upside

Singapore

DESPITE a contraction in the manufacturing sector, the Singapore economy grew a better-than-expected 2.6 per cent year-on-year in the first quarter of 2015 - breezing past even the most optimistic of projections. Thanks to an acceleration in the services sector, Q1 GDP growth beat both the initial flash estimate of 2.1 per cent growth, and the market's expectation that this could be raised slightly to 2.2 per cent. It was also faster than the 2.1 per cent growth in the preceding quarter.

The main drivers of Q1's expansion were the finance & insurance, wholesale & retail trade, and business services sectors, which grew 7.9 per cent, 4.1 per cent, and 2.8 per cent respectively. Together, they accounted for 79 per cent of GDP growth, and boosted services' expansion to 3.8 per cent from Q4 2014's 3.1 per cent.

The construction sector also saw far higher growth of 3.1 per cent in Q1, compared to the 0.7 per cent expansion registered in Q4 2014. This largely resulted from a pick-up in private-sector construction activities, which was in turn due to an increase in private commercial and residential building works.

The manufacturing sector, however, recorded the weakest performance in Q1. Because of output declines in the transport engineering, electronics, and biomedical manufacturing clusters, the manufacturing sector contracted by 2.7 per cent year-on-year, extending Q4 2014's 1.3 per cent decline.

Still, the sector ended up performing better than earlier forecast. While the flash estimate pointed to a larger contraction of 3.4 per cent, the increase in output in the chemicals cluster helped to offset some weakness.

Noting the disparity between services and manufacturing, Bank of America Merrill Lynch economist Chua Hak Bin said: "The decoupling of services from manufacturing growth is increasingly visible, in part of because of the disproportionate impact from restructuring, rising wage costs, and land constraints on manufacturing."

After seasonal adjustments and on an annualised basis, the Singapore economy grew 3.2 per cent quarter-on-quarter - far higher than the advance estimate of a 1.1 per cent expansion. However, it was a moderation from Q4 2014's 4.9 per cent quarter-on-quarter growth.

While private-sector economists cheered the "significant upward adjustment" to Q1 GDP growth, several pointed out that productivity growth remains elusive. Labour productivity contracted 0.6 per cent year-on-year in Q1, following 2014's 0.8 per cent decline.

Said HSBC economist Joseph Incalcaterra: "Marring the generally positive view is productivity growth - or rather, the lack thereof. The government has prioritised domestic restructuring and pushed for higher productivity for a few years now, with consecutive budgets laying out generous fiscal incentives.

"We expect productivity growth to eventually materialize, but below the government's 2-3 per cent goal. Weak domestic activity is making life difficult for the domestic-oriented services, where productivity is particularly soft given the strong labour needs. We believe that tight labour markets and higher wages are playing their part in limiting expansion amid weak consumption."

Still, at a media briefing on Tuesday, Ministry of Trade and Industry (MTI) Permanent Secretary Ow Foong Pheng said that improvements in sector-specific productivity measures have been "heartening" to note. These include indicators such as floor area constructed per man day in the construction sector, or revenue per square foot in the retail space.

Looking ahead, MTI cautioned that the external outlook "remains clouded with significant uncertainties and downside risks" - including the risk of a sharp correction in China's real estate market; uncertainties over Greece's future in the eurozone; and lingering apprehension over when, and the pace at which, the Federal Reserve will raise the Fed funds rate. Even with these threats on the horizon, MTI maintained its 2015 full-year growth projection of 2-4 per cent.

Economists like Barclays's Leong Wai Ho and Bill Diviney think full-year GDP will come in at the upper half of this range. "All told, we continue to expect a modest acceleration in GDP in 2015 to 3.4 per cent, with growth likely to see support from lower oil prices and stronger demand from the US and neighbouring Asean economies, which should offset the ongoing drag from the property market and labour market tightness," they said.

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