Economists divided over Singapore's higher GDP forecast

MTI raised its GDP projection to 2.5%-3.5% despite economic uncertainties.

The Ministry of Trade and Industry (MTI) raised its GDP forecast for 2018 to 2.5%-3.5%. It cited uncertainties and downsides that risks that have increased since early 2018.

MTI mentioned the "protectionist" actions and tariff measures that could "adversely affect international trade as well as dampen investor and consumer confidence." It also said financial vulnerabilities in countries with large debts could surface due to rising global interest rates.

On balance, MTI said the Singapore economy is expected to remain firm in 2018, with growth supported primarily by outward-oriented sectors. It cited the continued growth of the manufacturing sector and outward-oriented services sectors such as finance & insurance, transportation & storage, and wholesale trade to continue to benefit from healthy external demand.

J.P.Morgan economist Benjamin Shatil responded and said that their macroeconomic narrative for Singapore through 2018 hinges on external demand, with the developed market capex cycle a key force supporting the export and manufacturing sectors. "To the degree that external demand continues to soften this quarter, alongside elevated inventory accumulation in recent quarters, Singapore’s GDP growth is likely to slow through Q2," he said.

UOB economist Francis Tan is also cautious and concurred with Shatil that GDP growth could be lower than that in Q1. "This is predicated on a slower manufacturing sector due to the expected easing in China’s exports and investment growth. Moreover, risks in the horizon include potential trade protectionist rhetoric from the US and upside, cost-pushed inflationary surprises (due to the rising global oil prices) that could result in tighter global financial conditions as central banks turn more hawkish," he said.

Tan concurred with MTI's statement that this could be a big negative for emerging market economies’ liquidity conditions, especially those with elevated debt levels and stuck in twin (current account and fiscal) deficits. "We remain cautious and maintain our forecast of Singapore’s 2018 GDP to grow 2.8%, from 3.6% in 2017," he added.

Meanwhile, Maybank Kim Eng analyst Chua Hak Bin is more bullish towards the economy and forecasted GDP to grow to +3.5% (from +3.1%) at the upper bound of MTI’s range amidst stronger services uplift and more modest manufacturing slowdown. "We expect continued resilience in outward-oriented services and firmer recovery in domestically-oriented services, which will help offset the easing in manufacturing and trade," he said.

Moreover, he noted that the US-China trade tensions have subsided after both sides recently announced that they were putting tariffs on hold. He added, "Construction will likely recover by year-end given that strong en bloc sales and improving numbers for contracts awarded, which finally saw a reversal for the private sector in Q1 (+16% vs. -7.6% in Q4)."