Will the services sector buoy Singapore's GDP amidst manufacturing's slumping growth?

The sector could dampen injuries brought by the rising trade tensions to manufacturing.

The growth of Singapore’s gross domestic product (GDP) clocked in at 2.6% YoY in Q3, a muted one compared to the 4.1% expansion back in Q2. The economic indicator was still mainly backed by the manufacturing sector despite its growth slowdown to 4.5% YoY from 10.6% in Q2.

“The lower YoY growth in Q3 2018 was as expected, as early indicators pointed towards a more modest quarter," RHB commented. "Purchasing Managers' Index (PMI) has come off its highs, indicating a more challenging external environment.”

Singapore’s (PMI) recorded a slip of 0.2 ppt from August to seal a lower expansion of 52.4 in September amidst lower new orders and new exports, slower factory activity and lower inventory level.

The manufacturing sector was boosted mainly by output expansions in the electronics, biomedical manufacturing and transport engineering clusters but its semiconductor segment is notably on a downfall as its growth decelerated to 8.2% YoY in August from a 57.5% YoY expansion rate in August 2017.

Analysts believe that the US-China trade tensions will continue to take its toll on the export-dependent industry.

“Singapore’s manufacturers, particularly those in the semiconductors segment, are already experiencing slowing growth due to the maturing of the global electronics cycle, and business sentiment is likely to be further dampened by rising trade tensions,” Fitch Solutions said.

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“The prospects of a revival of trade negotiations between the US and China remain dim, and a further escalation in the trade dispute looks likely,” the firm added.

Amidst their predictions of challenging quarters ahead for the manufacturing sector, analysts were positive that the services sector, could, on the other hand, dampen the toils experienced by the export-exposed industry due to the escalating trade tensions. 

Expansion in the services sector kept its 2.9% growth pace with that of Q2 mainly backed by the finance & insurance, business services and wholesale & retail trade sectors. Retail sales dipped 0.4% in August to $3.8b mainly backed by the 10.4% sales increase recorded by petrol service sections.

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“On domestic-oriented sectors, positive contribution from the firm labour market environment should help improve growth in consumer discretionary spending, as it will likely be dampened by weaker external outlook that affects trade-related services whilst modest growth in retail sales points to a softening yet resilient domestic demand.” RHB said. 

Apart from the improvement in the labour market, the OCBC Treasury Outlook noted that an expected faster wage growth pace from 2018 to 2019 could further support a strengthened domestic demand.

“Note that policymakers tip the Singapore economy to remain on a steady expansion course for the quarters ahead with output kept slight above potential, and a small positive output gap is expected to persist into 2019 which will impart modest inflationary pressures,” they said.