Francis Tan
[email protected] Global Economics & Markets Research Email:
[email protected] URL: www.uob.com.sg/research Thursday, 25 May 2017
Singapore: Tradeable Sectors Continue To Boost Economic Growth in 1Q 2017
Flash Notes
Singapore’s 1Q 2017 GDP grew 2.7% y/y, in line with consensus estimates while surpassing government’s advance estimates of a 2.5% y/y growth rate. However, this is a slower growth rate compared to the 2.9% y/y expansion registered in 4Q 2016.
Robust performance in the tradeables sector such as the manufacturing and transport/storage sectors continued to contribute strongly to the overall GDP growth upgrade, while the construction and accommodation & food services sectors remained weak.
Both household demand and business investment remained weak. Consumption expenditure contracted for the 2nd consecutive quarter in 1Q 2017, the first time in a non-recessionary period since our data started in 1976. This could signal a deeper, structural issue within the labour market that weakened consumer sentiments and resulted in the contraction of household consumption.
The Trade Ministry maintained their “1% to 3%” 2017 GDP growth forecast, while adding that GDP growth may come in higher than the 2% in 2016, barring the materialization of several mentioned downside risks. We maintained our GDP growth forecast of 2.4%.
We believed that the 2.7% y/y growth in 1Q 2017 could be the peak on-year growth rate for 2017 and that growth rates in the next 3 quarters will be lower, although still higher than 2% y/y. With no strong upside to economic growth, and inflationary pressures capped by the weaker labour market conditions, we believe that the MAS will keep the SGD NEER on the current neutral appreciation stance in the upcoming October policy meeting.
UOB Maintains 2017 Economic Growth At 2.4%
Singapore’s 1Q 2017 GDP grew 2.7% y/y, in line with consensus estimates while surpassing government’s advance estimates of a 2.5% y/y growth rate. However, this is a slower growth rate compared to the 2.9% y/y expansion registered in 4Q 2016. As such, on a q/q SAAR basis, GDP contracted 1.3%, a pullback from the 12.3% growth in 4Q. Robust performance in the tradeables sector such as the manufacturing and transport/storage sectors continued to contribute strongly to the overall GDP growth upgrade. For instance, the manufacturing sector grew 8.0% y/y (-1.5% q/q SAAR), continuing the 11.5% y/y (+39.8% q/q SAAR) expansion a quarter ago. Within the manufacturing sector, strong growth was derived from both the electronics and precision engineering clusters. The strong global semiconductor demand had resulted in the production of semiconductors to grow at an on-year double digit pace over the past 13 months, at an average growth rate of 41% y/y. That spilled over positively to the precision engineering cluster, which experienced an average growth rate of 12.1% y/y over the past 8 months. The construction sector contracted 1.4% y/y (+4.3% q/q SAAR), extending the 2.8% y/y (+0.8% q/q SAAR) decline in 4Q 2016. The sector had contracted for the 3rd consecutive quarter already due to continued weakness in private sector construction works. The services sector picked up some pace and grew 1.6% y/y (-2.1% q/q SAAR) in 1Q 2017, up from 1.0% y/y (+8.4% q/q SAAR) in 4Q 2016. The faster pace of growth came from a robust pickup in the transportation and storage sector as it expanded 4.2% y/y (+0.2% q/q SAAR), largely driven by an increase in container throughput and sea cargo handled. Another bright spot in the services sector is the business services sector which expanded 2.1% y/y (+13.1% q/q SAAR), reversing the 1.9% y/y (+0.3 q/q SAAR) contraction from a quarter ago. Growth was supported by the professional services and other segments such as rental/leasing, other professional/scientific/technical services, and other administrative & support services. That said, the real estate segment continued to contract. The wholesale & retail trade sector expanded 0.5% y/y (-2.4% q/q SAAR), a pace similar to the 0.4% y/y (+2.2% q/q SAAR) growth in 4Q 2016. The finance & insurance sector grew 0.9% y/y (-17.8% q/q SAAR), improving slightly from the 0.6% y/y (+36.5% q/q Flash Notes Thursday, 25 May 2017
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SAAR) growth a quarter ago. Meanwhile, the information & communications sector grew 1.7% y/y (+5.2% q/q SAAR) in 1Q, higher than the 1.4% y/y (+0.9% q/q SAAR) growth in the previous quarter. The “other services industries” expanded 2.3% y/y (-1.6% q/q SAAR) in 1Q, slower than 3.9% y/y (+1.3% q/q SAAR) a quarter ago. This sector is mainly driven by growth in the education, health & social services, and the arts, entertainment & recreation segments. The key laggard in the 1Q GDP report was the accommodation & food services sector that contracted 1.9% y/y (-5.2% q/q SAAR), extending the 0.2% y/y (-7.2% q/q SAAR) contraction from the previous quarter. Weakness in this sector was due to lower sales volume in restaurants. Exhibit 1 shows the performance of the various sectors. Exhibit 1: Performance of GDP Sectors In 2016 and 1Q 2017 % y/y
Goods Producing Industries
10
Services Producing Industries
8.0
8 6
4.2
3.6
4
2.3
2
1.7
2.3
1.7
0.7
0.2
2.1
0.9
0.6
0.5
0 -2 -4
-1.4 Manufacturing
Weight:
18%
-0.9
-1.9
Construction
Infocomms
Transport & Storage
5%
4%
8%
Accommodation & Food Services 2%
2016
Finance & Insurance
Wholesale & Retail Trade
13%
18%
Business Services 13%
1Q2017
Source: CEIC, UOB Global Economics & Markets Research
Economic Growth Continued to be Supported By Tradeables Sector, Though the Growth Rate in 1Q Could be the Peak
The pickup in GDP growth since 4Q 2016 certainly helped to boost confidence for the stakeholders in the economy. This is much needed since both consumption and investment continued to contract for the 2nd and 3rd quarter respectively in 1Q 2017 (Exhibit 2). As can be seen from Exhibit 2 and from our observation across GDP data since 1976, consumption expenditure has never contracted for 2 consecutive quarters (on a y/y basis) during a non-recessionary period and this episode marks that first time. The phenomenon did not start only during 4Q 2016 when consumption fell for the first time. The rapid slowdown in the growth rate since 4Q 2015 probably served as a warning. This could signal a deeper, structural issue within the labour market that weakened consumer sentiments and resulted in the contraction of household consumption. Indeed, the latest 4Q 2016 job vacancy to unemployed ratio, at 0.77, is the Exhibit 2: Continued Weakness In Both Consumption & Investment In 1Q 2017 % y/y
Recession
25 20 15 10
5.9
5
-0.3 -0.4
0 -5 -10 2006
2007
2008
2009
2010
Consumption
2011
2012
2013
2014
2015
2016
2017
Investment
Source: CEIC, UOB Global Economics & Markets Research
Flash Notes Thursday, 25 May 2017
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worst since the global financial crisis (29 quarters ago); while the unemployment rate, at 2.3%, is also the highest since the crisis. On the other hand, the slower economic growth from the past 2 years had affected business investments and risk appetite, and had directly impacted the growth rate of investments (ie: gross fixed capital formation). Lower amount of investments will eventually mean lesser need for workers as a factor of production. That in turn will mean higher unemployment, lower consumer spending, and another round of lower business revenue. This could be a vicious cycle that may become reality if not for the various initiatives pushed out earlier this year via the Committee on the Future Economy (CFE) and the Singapore Budget 2017. That said, the rebound in the growth rate of consumption and investment is heartening. On industries performance, from the sectors that experienced a quicker growth rate in 4Q 2016 and 1Q 2017, it’s clear to us that the green shoots in the economy is driven by the tradeables sector. This certainly is good news as it signals a cyclical recovery in global demand. We remain optimistic in the continuing growth for the electronics and precision engineering clusters in 2017. However, the double-digit growth for semiconductor production may slow into the single digits as we proceed into the second half of the year, due to base effects and a slower 2H capex growth expected in China. However, headwinds and uncertainties to growth remain due to the upcoming elections in several European countries as it may fuel further populist, anti-trade sentiments which will be a strong negative for Singapore’s trade-dependent economy. Additionally, policy surprises from the new US administration could add on to the cautious consumer and business sentiments, further constraining incremental discretionary consumption and business investments. In the Trade Ministry’s report today, they maintained their “1% to 3%” 2017 GDP growth forecast, while adding that GDP growth may come in higher than the 2% in 2016, barring the materialization of several mentioned downside risks (such as anti-globalisation sentiments weighing on global trade and monetary tightening in China.). We are maintaining our 2017 GDP forecast of 2.4%, which we had upgraded from our previous forecast of 1.8% back in February 2017. We believed that the 2.7% y/y growth in 1Q 2017 could be the peak on-year growth rate for 2017 and that growth rates in the next 3 quarters will be lower, although still higher than 2% y/y. With no strong upside to economic growth, and inflationary pressures capped by the weaker labour market conditions, we believe that the MAS will keep the SGD NEER on the current neutral appreciation stance in the upcoming October policy meeting.
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