15 October 2018

Your Weekly Market Focus
Steady growth in 3Q 2018 sees MAS tightening

Selena Ling, Head, Treasury Research & Strategy, OCBC Bank, Member of OCBC Wealth Panel

Singapore’s economy expanded 2.6% year on year (YoY), higher than our forecast of 2.3% YoY. On a quarter on quarter (QoQ) basis, growth came in at 4.7% after seasonally adjusted annual rate (SAAR), and Bloomberg market consensus forecast of 2.4% YoY.

The key contributor was manufacturing, which moderated from double-digit growth in 1H 2018 to 4.5% YoY (7.6% QoQ SAAR), albeit this was on the back of a high base in 19.1% YoY (34.9% QoQ SAAR) in 3Q2017.

Notably, the electronics, biomedical manufacturing and transport engineering clusters provided the main support to the manufacturing sector. Services also maintained momentum at 2.9% YoY (6.3% QoQ SAAR), buoyed by finance & insurance, business services and wholesale & retail trade industries. However, construction continued to contract by 3.1% YoY (albeit it rebounded QoQ for the first time since 1Q18 by 1.7% QoQ SAAR) amid weakness in public sector construction activities.

Slower but a steady growth trajectory still expected
We have upgraded our full-year 2018 growth forecast from 3% to 3.3%, assuming 4Q 2018 growth could ease further to around 2% YoY, while retaining our 2019 growth forecast at 2.7% (with a lower range bound at 2.2% should the full US$505b of US trade tariffs be enacted against China in 2019).

For the first three quarters of 2018, the Singapore economy clocked 3.8% YoY growth, which is the best 9-month performance since 2013. This explains why MAS-MTI opined that the Singapore economy has largely evolved as envisaged in the April 2018 policy review and tips the level of economic activity as slightly above potential.

The official forecast is for GDP growth to come in within the upper half of the 2.5-3.5% range this year and moderate slightly in 2019.

Growth drivers are transitioning from manufacturing to services
The policy confidence to tighten monetary policy again suggests that the maturing of the global electronics cycle and the expected waning contribution of manufacturing to growth, as well as the US-China trade war spill over and uncertainties have largely been factored in and have not precipitated a shift in their growth parameters for either 2018 or 2019.

As such, there are no explicit dovish overtones in the MPS statement. Barring a significant setback in global growth, the Singapore economy is tipped to expand at a pace close to potential in 2019. That said, it remains doubtful if there will be any further tightening impetus in 2019 and S$NEER gradient will likely be more modest than its pre-GFC slope in today’s global growth environment.

OCBC MoneyMonday™