Island nation’s growth forecast for 2014 also revised downward following reversal after first quarter growth, reports Team IFM
Singapore, July 18, 2014: Singapore’s growth shrunk in the second quarter after notching an ascent in the first, primarily because of a decline in the manufacturing sector, prompting financial institutions to downgrade their GDP foresight for 2014 citing the island nation’s “weak” factory segment.
“The Singapore economy grew by 2.1 percent on a year-on-year basis in the second quarter of 2014, slower than the 4.7 percent growth in the previous quarter,” said the government data agency Statistics Singapore.
“On a quarter-on-quarter seasonally-adjusted annualised basis, the economy contracted by 0.8 percent, a reversal from the 1.6 percent growth in the preceding quarter,” it said in a July 14 statement.
In contrast to the drop for the first time in seven quarters, the median forecast of 17 economists polled in a Bloomberg News survey projected a gain of 2.4 percent.
The manufacturing sector was dragged down by dipping performance of electronics, one of its mainstays – the other being pharmaceuticals; electronics accounts for a third of Singapore’s revenues from manufacturing.
However, the sector has lagged behind in the rest of the region in recent years as the economy has become increasingly reliant on trade, financial services, tourism, and property development.
“The manufacturing sector, the key driver of growth in the previous quarter, now became the weakest link,” said DBS Bank, Singapore’s largest bank by assets, in a note.
Economists also attributed the decline to Singapore’s efforts to reshape its economy. Apart from the slide in manufacturing, it has tightened its labour laws to check the influx of less costly foreign workers, forcing a leading semi-conductor manufacturer, Western Digital Corp, to shift production base overseas and disturb the island nation’s manufacturing numbers.
In a June 13 statement on Singapore’s labour market in the first quarter, the Ministry of Manpower said more residents, “especially the less educated”, were encouraged to enter the labour force, given that there were more job openings, increased wages, and tightened foreign manpower controls.
In addition to foreign labour controls, the Singaporean authorities are also taking steps to attract newer industries such as those engaged in research and development. Going by the latest data, the move has apparently backfired, say economists.
“Restructuring appears to be failing. Growth is being impeded by tight labour constraints even as global demand recovers,” wrote Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, in a note after the GDP report. “Economic activity is losing steam despite a healthier global backdrop.”
Incidentally, the last time that Singapore’s GDP shrank – in the seasonally adjusted annualised quarter-on-quarter advance estimates – was in the July-September quarter of 2012, when it contracted by 3.6 percent.
“Structural changes in Singapore’s economy will act as a constraint on medium-term growth, even as cyclical conditions improve,” said research house Capital Economics in a note.
Capital also downgraded its growth forecast for the current year from 4 percent to 3.5 percent, saying: “The days of trail-blazing industrialisation are long over.”
Similarly, United Overseas Bank (UOB) also whittled down its growth forecast, paring it to 3.5 percent from 4.2 percent projected earlier.
“Not only may we see slower external demand,” UOB said in a note, “Singapore’s domestic sectors will also continue to face challenges from the ongoing economic restructuring amid tight labour market conditions.”
Statistics Singapore noted that the economy’s 0.8 percent contraction on a quarter-on-quarter seasonally-adjusted annualised basis was a reversal from the 1.6 percent growth registered in the January-March quarter.
The data office also identified a decline in electronics as one of the main reasons for the sluggish second quarter growth, with the manufacturing sector taking a hit primarily due to a sharp fall in the production of semiconductors, a low value-added industry that the island nation is so dependent on.
On a year-on-year basis, the manufacturing sector grew by 0.2 percent in the second quarter, moderating from the 9.9 percent expansion in the previous quarter, the agency said.
“The deceleration in growth was largely due to a contraction in electronics output and slower growth in transport engineering output,” it added.
On a quarter-on-quarter basis, the manufacturing sector contracted at an annualised rate of 19.4 percent, in contrast to the 12.2 percent expansion in the preceding quarter.
The decline was led by the falling output of the electronics cluster, which fell 7.5 percent year-on-year in the month under review.
Infocom and consumer electronics as well as other electronics modules and components segments grew 9.1 percent and 2 percent, respectively, the data office said, but the gains were negated by the semiconductor segment, output of which decreased 6.4 percent.
On the brighter side, Statistics Singapore said, the cumulative output of the electronics cluster expanded 2.7 percent from January to May this year, compared to the same period last year.
Another sector driving an economy but undergoing a slowdown in Singapore in the second quarter was construction, which registered a 5 percent year-on-year growth, lower than 6.4 percent notched in the preceding quarter.
The data office attributed the lower rate of growth to a slowdown in private sector construction activities.
On a quarter-on-quarter basis, the sector expanded at an annualised rate of 2.6 percent – a rare improvement from the 0.5 percent contraction recorded in the previous quarter.
Also slowing down growth in the quarter under review was services producing industries, which grew by 2.8 percent on a year-on-year basis, following the 3.9 percent growth in the previous quarter.
The moderation in growth was largely due to slower expansion in the wholesale and retail trade and transportation and storage sectors.
On a quarter-on-quarter basis, the services producing industries grew at an annualised rate of 5.2 percent, a reversal from the 1.4 percent contraction in the preceding quarter.
The Ministry of Trade and Industry will release the preliminary GDP estimates for the second quarter in August 2014 in its “Economic Survey of Singapore” report, which will include performance by sectors, sources of growth, inflation, employment and productivity.
The Statistics Singapore statement did not dwell on the pharmaceutical sector, but official data for the manufacturing sector’s performance in May saw it declining 11.6 percent – primarily on account of a lower production of active pharmaceutical ingredients.
As a direct fallout of this, the biomedical manufacturing cluster’s output contracted 9.2 percent, compared to the same month a year ago.
On a year-to-date basis, output of the biomedical manufacturing cluster increased 11.2 percent, compared to the same period a year ago.
On a year-on-year basis, Singapore’s manufacturing output declined 2.5 percent in May; excluding the biomedical segment, the fall was only 0.5 percent.
On a seasonally adjusted month-on-month basis, output contracted 5.7 percent but increased 0.4 percent after excluding biomedical production.