Hopes rise as Singapore GDP may grow to 5.3% in 2H11

After a weak 2Q11, 2H is expected to be moderately better as manufacturing recovers from the supply chain disruption in Japan, etc. Bolstered by pharmaceuticals, the improvement in manufacturing to 6.9% in 2H11 (from 4.2% in 1H) could lift 2H GDP growth to 5.3% (vs. 4.9% in 1H).

However, the financial market uncertainties could present downside risks to our 2011 GDP forecast, and impact GDP growth in 4Q11 and maybe 1Q12 as well.

Nevertheless, we expect electronics output to pick up moderately as firms replenish their inventories in 2Q12, but pharma is expected to moderate after a strong 2011. Thus, we expect slightly softer manufacturing growth of 4.5% in 2012 from 5.5% in 2011.

Services is likely to moderate to 4.6%, as the volatility in the financial markets hit consumer sentiment and the financial- related sector.

We therefore expect GDP growth to ease to 4.5% in 2012 from 5.1% in 2011.

Inflation, which is likely to average 5.0% this year, should be driven largely by domestic contributors, mainly housing and transport. Already in the first 8 months of 2011, inflation is up 5.1%, but is likely to ease further in the coming months.

In 2012, we may see domestic contributors like housing and base effects moving inflation the other direction. Easing global commodity prices could also help. Inflation could moderate to 2.8% in 2012 as a result.

With headline inflation likely to remain above 4.0% for the rest of 2011 and core sticky at the current 2.2% level, we do not expect MAS to act aggressively to boost growth but continue to monitor inflation.

Instead, we think that a move to a “modest and gradual” appreciation of the S$NEER from its current “steeper appreciation” stance would be appropriate. This normalization of policy will return policy back to where it was prior to Oct 2010 where the slope was around 2%+ and should be
supportive of growth and cost competitiveness.

Our analysis of growth for 2012 is premise on the pharma sector continuing to grow (holding all other sectors constant).

Pharma accounts for about 17.1% of value-add in manufacturing.

In the near term, the ongoing turmoil in Europe, which is a main destination for pharmaceuticals, represents a downside risk to pharma demand in 2012, but if the European situation calms down, then there could be upside surprises. Our current assumption is for pharma to grow 12%. If there is no growth in pharma, then manufacturing is likely to expand by just 2.4% instead of the 4.5% in our base scenario.

In the worst case, if pharma contracts, then overall manufacturing could decline around 1.9% in 2012.

Thus, if the current crisis persists, there is downside risk to our GDP forecast for 2012 with the economy growing closer to 3- 4% instead of our baseline forecast of 4.5%.