How Singapore's worse-than-expected industrial output will hurt economy

GDP forecast revised down to 3.6%.

According to Bank of America Merrill Lynch, Singapore's industrial production contracted 5.9% in June from a year ago, slightly better than it expected, but much worse versus market expectations.

BofAML expects 2Q GDP growth to be revised slightly downwards to +3.6% yoy (+14.8% qoq saar), from government flash estimates of +3.7% (+15.2% qoq
saar).

The latest IP print implies weaker manufacturing growth of +0.5% yoy in 2Q, vs. flash estimates of +1.1%. Overall GDP growth will continue to be driven by the services sector.

Here's more:

Contraction was led by pharmaceuticals (-28.9%), precision engineering (-16.4%) and chemicals (-4.1%). Transport engineering staged a rebound (to +7.4% vs. -11.4% in May), and electronics expanded a better-than-expected +2.6% (vs. +2.4%). On a mom seasonally adjusted basis, IP fell 3.1% in June from May.

In 2Q, services growth was powered by the financial sector, as well as a rebound in transportation & storage and wholesale & retail trade.

In April and May, total loans grew an average +16% from a year ago. SGX and SIMEX turnover was also significantly higher in 2Q compared to 1Q. A rebound in re-exports growth and higher retail sales bode well for the wholesale & retail trade sector.

Construction indicators are indicating a slight slowdown. Progress payments are up +4.2% yoy in Apr-May, vs. +4.9% in 1Q. We expect construction growth to remain in a healthy range, supported by housing and public transportation projects.

We maintain our +2.5% GDP forecast for the full year. The Monetary Authority of Singapore (MAS) has said that growth will "comfortably" meet the official GDP forecast of 1%-3%.

Firmer tech manufacturing output and healthy re-export trade volumes point to a better manufacturing and export outlook for the second half.