No silver lining for Singapore economy in 2012

Weak Q4 economic preview data is precursor for an even slower 2012, says HSBC.

2012 growth is predicted to hover in the measly 2% as it gets battered on all fronts -- from a worldwide demand slump to increased belt-tightening among Singaporeans bracing for a recession.

Here's more from HSBC:

Advance estimates for Q4 GDP were weak, with growth easing to 3.6% y-o-y (vs. 5.9% in Q3) and turning negative sequentially (-4.9% q-o-q SAAR vs. +1.5% in Q3). Growth is expected to remain weak during the first half of 2012 led by exports, while domestic demand will provide some support.

Facts
According to advance estimates, Q4 GDP growth rose to 3.6% y-o-y (vs. a slightly downwardly revised 5.9% in Q3 2011) and contracted by 4.9% q-o-q SAAR (vs. 1.5% expansion in Q3). This was below consensus of 4.3% y-o-y, but was closer to our 3.3% call.

For 2011 as a whole growth came in at an estimated 4.8% y-o-y (vs. 14.5% in 2010).

The moderation of growth in Q4 was largely due to the slowdown in the manufacturing sector. On an annual basis, manufacturing slowed to 6.5% y-o-y (vs. 13.4% in Q3) and on a sequential q-o-q SAAR basis, manufacturing contracted by nearly 22% (vs. +10% in Q3). The weakness in manufacturing was primarily driven by the electronics sector and a pull back in the pharmaceutical sector.

The construction sector, on the other hand, saw growth rise to 1.7% y-o-y (vs. 0.5% in Q3) and a smaller sequential contraction (-6.7% q-o-q SAAR vs.
-10.6% in Q3), with improvements mainly in seen in the residential segment.

Service sector activity was more modest, with services rising just 3.2% y-o-y (vs. 3.7% in Q3). However, on a sequential basis services improved, rising 3.4% q-o-q SAAR (vs. a 0.5% contraction in Q3), mainly led by wholesale trading.

Implications
Singapore's high beta status was confirmed by these numbers. Without the fickle pharmaceutical sector riding to the rescue this time around, the softness in the underlying momentum was clearly visible.

The manufacturing sector, and the electronics cluster in particular, have been hit hard by the weakness in final demand from the US and Europe. The same goes for the trade and more sentiment sensitive segments of the service sector. This is likely to persist. Moreover, slower growth in China and the rest of Asia will also dampen external demand in 2012.

Domestic demand, mosly private consumption, will help cushion the slowdown, with consumer spending supported by still favorable labour market conditions. However, consumer sentiments are likely to be dampened by the persistence of global economic uncertainty. This means that Singaporeans will likely start to tighten their purse strings until the fog surrounding the global economic outlook lifts.

These factors will keep growth weak during the first half of 2012. A moderate recovery is projected during the second half in line with an expected improvement in the global trade cycle, taking full-year growth to 2% in 2012, well below its potential.

In spite of the projected slowdown, the MAS is likely to maintain its tightening bias for now given the elevated level of inflation. But, it will take full advantage of the flexibility afforded within the NEER band to accommodate global weakness. However, in the event the sovereign debt crisis in Europe escalates further and/or prolongs, the MAS may need to recalibrate monetary policy settings by twisting and shifting the band.

Bottom line: Advance Q4 GDP numbers were weak, but growth is set to slow further as the global economy cools. Private domestic consumption will provide some cushion, but not enough to prevent growth from sinking well below its potential.