Singapore 2012 GDP growth to be the most sluggish since 2009

DBS predicts it will be a measly 1.3%.

According to DBS, the economy is expected to expand 2.5% QoQ saar (1.3% YoY) in the quarter. This is an upward revision from the advance estimate of 1.8% QoQ saar (1.1% YoY). It also marks a turnaround in the growth trajectory from the 6% decline in the previous quarter. 

Overall, this will bring full year GDP growth to 1.3%. This is the slowest full year growth since 2009 as well as the weakest across East Asia in 2012.

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The main drag came from the manufacturing sector although the other sectors performed poorly as well. Weak demand from the developed economies is one
convenient factor behind the poor GDP figures. But we reckon there are structural constraints as well.

The drastic decline in Singapore’s export competitiveness is certainly one key factor behind the poor outcome. A higher than average inflation has eroded overall competitiveness and a strengthening Sing dollar implies translation losses when the US dollar export revenues are converted back into Sing dollar terms.

That is, the export sector, an important engine for the economy, is facing a double whammy and seeing tremendous margin compression. This mainly explains the decline in the manufacturing sector and probably has also resulted in the drag on the other sectors.

In fact, the compounded effects of the tightening in the exchange rate policy as well as the foreign labour policy will imply that Singapore will continue to underperform in terms of growth and inflation profiles within the region. The phenomenon of slow growth, high inflation will persist in the coming quarters.

Structural factors are at play, resulting in such poor performance. On a cyclical basis, we expect a gradual improvement in the higher frequency data in the coming months, led by a possible recovery in China investment growth. As it is, export performance and industrial production have bottomed. And most recent December data are pointing to some improvement ahead.

Though key electronics sector probably will remain sluggish in the months to come, exelectronics manufacturing, particularly the pharmaceutical and the transport engineering segments are leading the way. A recovery in the manufacturing sector should become evident by 2Q13.

More importantly, services sector has made the turn in 4Q12. Year-on-year growth in this sector has been declining steadily over the last two years. But it probably grew 1.7% YoY in 4Q12 compared to just 0.2% in the previous quarter.

Sequentially, it expanded by a solid 7% in 4Q12 against a decline of 3.9% in the third quarter. Now this sector accounts for about 68% of overall GDP. If this sector turns, the entire economy will move along with it. This has been evident on several occasions in previous years.

With that, we continue to maintain our full year GDP growth forecast of 3.2% for the year. Growth momentum in the near term will remain flattish but it should pick up from the second quarter onwards.