HSBC: Singapore economy's recovery “too fast to last”

The bank says growth in 2011 is projected to slow to 4.7% (from 4.5%) y-o-y after bouncing back at “Formula 1 speed” for the first half of this year.

The economy bounced back since the business cycle trough in Q1 2009 and delivered average sequential growth rates of slightly above 20% q-o-q SAAR until Q2 2010. It eventually averaged to more than 36% q-o-q SAAR during H1 2010.

In a statement, HSBC said that while Singapore’s recovery from the global economic crisis is “impressive by most standards,” the dip in Q3 GDP showed that the momentum cannot be sustained.

The bank said the 18.7% GDP drop q-o-q SAAR reflected a base effect, the lull in global trade during the summer, and scheduled production shutdowns in the pharmaceutical sector due to changes in the product mix.

HSBC said that while growth is expected to return to positive territory in the quarters ahead, expansion will take place at a more sustainable speed. “In Q4, sequential growth will come in slightly above zero as exports recover from the summer lull and as more pharmaceutical production facilities come back on-stream,” the bank said.

While the developments are expected to take full-year growth to an upwardly revised 14.8% (from 13.2%) y-o-y for 2010, growth next year is projected to slow to 4.7% (from 4.5%) y-o-y, mostly due to the smaller contribution from net exports and a drawdown in inventories as the global restocking cycle is coming to an end.

HSBC noted, however, that the drag is expected to reverse in 2012 with the recovery in global growth. A GDP growth of 5.8% and a rise in private domestic demand is expected for the said year.

According to HSBC, the current rise in inflation rate means the MAS will need to continue its tightening stance and remain vigilant to address inflation pressures.

“Despite the speed bump, the MAS cannot take the foot off the brake yet. Inflation has been creeping up and is expected to remain elevated for the next few months as capacity will remain tight even as growth slows to a more sustainable pace,” the bank said.