Singapore economy likely back into the red in 2Q

Advance GDP estimates for 2Q is due this Fri but DBS worries over sluggish global demand and cyclical drop in pharma output.

Here's from DBS Group Research:

It will be a close call between whether the economy remains in expansion mode or has dipped into contraction territory.

Market is pretty much split between both outcomes. Our sense is with the former although there is a fairly even chance of the economy falling back into the red after a solid 10% expansion in 1Q12.

A modest expansion of 0.4% QoQ saar has been factored into our forecast, which implies a 2.3% YoY rise.

It is unlikely anyone will want to pay attention to the year-on-year improvement to 2.3%, from 1.5% previous. It is distorted by the low base arising from the earthquake in Japan last year, which disrupted global manufacturing supply chain.

The sequential growth figure is the one to watch and in this aspect, the two key cylinders, manufacturing
and services, are undeniably losing steam.

Sluggish global demand is the key reason but the cyclical drop in production output in the pharmaceutical segment has further exacerbated the weakness in the manufacturing sector.

Consequently, some spillover effects on those externally driven services industries can be expected.

Moreover, the tightening measures arising from the current restructuring exercise are likely to have suppressed growth momentum in some of those foreign labour-intensive industries.

Plainly, this pullback in growth in the second quarter is in line with our long held expectation.

Reason being the factors – electronics restocking and surge in pharmaceutical production – that drove GDP growth in the first quarter are not sustainable amid the global demand weakness. Europe remains the biggest risk and a fading growth momentum in the US is certainly not helpful.

Our forecast for the full year GDP growth would have been raised on account of the better than expected first quarter growth if not for the looming uncertainties ahead.

Though we’re currently sticking to our long-held GDP growth forecast of 3.5% for  2012, downside risk has emerged.