Singapore’s economic woes mount as services momentum stumbles

The country barely escaped recession.

The services sector was once considered a bulwark of Singapore’s economy, but first-quarter figures show that growth is steadily heading south. Services growth contracted by 5.9% quarter-on-quarter, down from an already anaemic forecast of -3.8% quarter-on-quarter in advance forecasts.

Analysts warn that the poor performance from the services sector bodes ill for the rest of the economy, particularly because it accounts for about two-thirds of the GDP.

“When the services sector turns, the economy follows. This essentially makes for significant downside risk to growth in the coming quarters,” DBS Vickers noted in a report.

Meanwhile, UOB economist Francis Tan notes that although the services sector managed to continue holding up overall growth, it grew at the slowest pace since the global financial crisis in Q1.

"[This possibly indicates] that the negative spillover effects to the services sector from the prolonged contraction in the manufacturing sector may have begun," Tan said.

"Indeed, although Singapore’s domestic economic conditions remain relatively strong, in view of the low
unemployment rate and wage gains in 2015, some of the more externally-driven services sectors were hit by the global growth slowdown, while the domestically-driven sectors are feeling the lagged impact from the
manufacturing sector contraction," Tan added.

As a result of lacklustre external conditions and weak domestic demand, experts reckon that overall growth prospects will remain muted in the first half.

"While it will be helpful for exporters of goods and services, the resulting impact will be higher domestic interest rates. With current expectations of still-low inflation in 2016, this may result in higher real interest rates and could further impede investment and consumption growth,” Tan noted.

"There is nothing to shout about in Wednesday’s number. Growth of 0.2% q-o-q saar is anaemic. While a contraction has been averted, growth remains weak, with the key drag coming from the services sector, supposedly the main engine of growth," DBS Vickers noted.