The weakest link: Sluggish manufacturing sector drags GDP in Q2

Services and construction sectors are also key culprits.

The country’s manufacturing sector has fallen from grace. After being hailed as a key driver of growth in Q1, the sector has now become the weakest link in the country’s Q2 growth.

According to DBS, the weak manufacturing sector was the main drag on the country’s growth in Q2, as the sector’s growth slipped to a mere 0.2% YoY, from 9.9% previously.

Weaknesses in the services sector and in the construction sector are also among the key culprits in Q2’s GDP contraction.

“To begin with, the strong showing by the manufacturing sector in the first quarter has never appeared to be sustainable in our opinion. Reason being that the strong output growth in 1Q14 was driven much by a combination of one-off factors. The surge in pharmaceutical output and a sharp spike-up in offshore marine engineering production were never meant to persist. As these impetuses dissipated, manufacturing growth naturally ebbed. Moreover, a cyclical slow­down and the decline in external competitiveness compounded the woes faced by manufacturers.”

Here’s more from DBS:

Moreover, services sector growth did moderate, as expected too. Growth slowed to 2.8% YoY, from 3.9% previously. There has been a downward trend in growth pace and this certainly will warrant close attention. While a base effect is at work, sequential growth in the sector has been tepid too.

The existing labour crunch due to curbs in foreign manpower has been taking a toll on the sector. There is a risk that this sector may continue to decelerate in the coming quarters, which will post a threat to the medium-term prospects of the economy, given its relatively large contribution to GDP and employment.

Lastly, construction sector growth has also moderated, to 5.0% YoY, from 6.4% in 1Q14. Tightening measures in foreign labour policy, associated with the restructuring, are biting and eroding the performance of the sector. Slowdown in the property market has further dampened the outlook for this sec­tor.

While the outlook of the manufacturing sector is expected to run sideways, the sub-par performance in the services sector is perhaps the biggest risk to our full year GDP growth forecast of 4.0%. If the growth momentum in this sector con­tinues to moderate, our full year GDP growth forecast will have to be lowered