Painful plummet: Singapore’s GDP growth to dip to 3%

Manufacturing suffered a staggering 9.7 pp drop.

Singapore’s overall economy is slowing down across all sectors, as the previously strong manufacturing sector became the weakest link this quarter.

A report by DBS indicates that the strong showing by the manufacturer in the previous quarter was not sustainable because the surge in pharmaceutical output and a spike-up in offshore marine engineering production were never meant to persist.

DBS also reveals that the key electronics sector is still in the doldrums, as exports have been declining for the last 23 months. The EDB says that there won’t be a light at the end of the tunnel for some time, the reason for which is yet unclear.

Here’s more from DBS:

Moreover, the manufacturing sector is being weighed down by the restructuring and weak export competitiveness. Non-oil domestic exports (NODX) could possibly see the second consecutive year of decline after a harsh 6% contraction last year. The labour crunch remains a problem with higher costs affecting exporters’ ability to compete. The hope is for productivity growth to pick up but that will take time. Plainly, the near-term outlook of the manufacturing sector has been dampened by restructuring.

There is a risk that the services sector continues to slow in the coming quarters owing to the labour crunch. This would pose a threat to the medium-term prospects for the economy given its relatively large share in GDP and employment.

The sector accounts for about 70% of GDP and total employment share in 2013. The continued slide in services sector growth is the biggest risk at the moment. Lastly, construction sector growth has also moderated, to 5.0% YoY, from 6.4% in 1Q14. Both demand and supply side issues are at play. The tightening in foreign labour policy associated with the restructuring is having an effect here. The slowdown in the property market due to earlier cooling measures has also dampened prospects for this sector.

The external outlook remains a question. While expectation of a gradual recovery remains in place, recent data have been mixed. Demand from Asia and the West remains sluggish. Growth expectation for the US has been lowered. This is juxtaposed against a weak Eurozone and a slowdown in China. None of this bodes well for Singapore.

The economy continues to be weighed down by the domestic restructuring and external uncertainties. Manufacturing is in doldrums but the services sector is the biggest risk. We have downgraded our full year GDP growth forecast for 2014 to 3%. A marginal improvement to 3.6% is expected in 2015.