What grinds Singapore's gears: Dull manufacturing pace to drag 2Q14 GDP growth

And the only saving grace is the equally struglling services sector.

Analysts are preparing for economic headaches that will surely strike them when Singapore's 2Q14 GDP growth numbers come out.

According to DBS, they expect 2Q14 GDP growth to moderate on slower manufacturing activity. First quarter GDP growth has been healthy on account of strong growth in the manufacturing sector (9.8% YoY). But that will be lacking in the second quarter.

Here's more from DBS:

The first hint of slower growth in the second quarter came from a lacklustre showing in the April industrial production (IP).

The headline industrial production index fell by 4.7% MoM sa. In year-on-year terms, IP moderated to 4.6% YoY, from 12.1% previously.

And as highlighted in this space on Monday, the strong showing in IP over the last 1-2 months were driven by the pick-up in pharmaceutical output (+19.4%) and a sharp spike in offshore marine engineering cluster (+45.1%) due to a oneoff delivery of oil bunkers.

Both are not sustainable. IP will ease when these one-off factors dissipate.

And that was exactly what happened in April, which led to the moderation in the headline number. Specifically, growth in the offshore marine engineering cluster eased sharply to 8.2% YoY, from a surge of 42.6% in the previous month.

In addition, the manufacturing sector also saw a sharp decline in electronics output. Production in the electronics cluster contracted by 11% YoY, on the back of a drastic 24.4% drop in the semi-conductor segment.

While our long held view is that the electronics cluster is due for some consolidation in production activity, the decline was more severe than expected.

Based on EDB’s press release, it is due to “firm specific factor”. More importantly, the authority stated that “the decline will be registered in the year-on-year growth for the rest of the year”, suggesting that this is a case of a shutdown in one of the semicon production plants.

Plainly, this is not a cyclical issue per se. This is structural and it certainly raised questions with regards to the reasons for the closing down. Is this a case of “hol-lowing-out” in the semiconductor segment, in similar light as what we’ve seen previously in the disk drive segment? Or does this reflect a decline in Singapore’s overall attractiveness as a manufacturing hub and a dilution of the economy’s competitiveness?

These are questions that require answers. But only time will tell perhaps.

Meanwhile, the slower manufacturing growth will have an impact on headline GDP growth in 2Q14. Growth to moderate unless the services sector is able to pick up the slack. On that, the services sector is also struggling.

Services growth will likely continue to moderate due to cost pressure and the labour crunch. It will get tougher in the second quarter.