16 July 2018
Selena Ling, Head, Treasury Research & Strategy, OCBC Bank, Member of OCBC Wealth Panel
The Singapore economy moderated to 3.8% year on year (yoy) or 1.0% quarter on quarter (qoq) on a seasonally adjusted annual rate (SAAR) in 2Q2018 based on advance estimates.
This is below our expectations for 4.0% yoy (0.9% qoq saar) and market consensus forecast of 4.1% yoy (1.3% qoq saar), as well as a moderation from 1Q2018 GDP growth of 4.4% yoy (1.7% qoq saar). Nevertheless, this is the fifth consecutive quarter of qoq growth, albeit also the slowest qoq growth in a year.
Notably, manufacturing growth slowed to 8.6% yoy but shrank 0.1% qoq (first qoq contraction since 4Q17) in 2Q18, down from 9.7% yoy (21.3% qoq) in 1Q18. The key difference was that the biomedical manufacturing clusters contributed the most to the sector’s growth, in addition to the electronics sector whose momentum is already moderating.
Services growth also eased from 4.0% yoy in 1Q to 3.4% yoy, but rebounded from -1.4% qoq to +2.5% qoq in 2Q. Increasingly, services growth is expected to serve as the bulwark for growth going into 2H18. Meanwhile, construction remained the laggard to continue to contract by 4.4% yoy (-14.6% qoq) amid sustained weakness in private sector construction activities. We had initially expected the construction sector to potentially bottom by end of 2018, but given that the recent cooling measures in the form of a hike to the Additional Buyer Stamp Duty (ABSD) rates and tighter Loan-To-Value (LTV) is likely to dampen the private residential market sentiment and activity in the near-term, there may not be light at the end of the tunnel this year for the construction sector’s growth.
The Singapore economy grew by around 4.1% yoy in the first half of 2018. Assuming that growth momentum continues to decelerate to around 2% yoy, we will still see full-year GDP growth close to the 3% yoy handle. The six-million dollar question remains if the ongoing US-Sino trade war will escalate or de-escalate in the coming months and if the next leg of the US$200b tariff list by the US will materialise after the public comment period ends in August.
If so, there could be further dampening effects on business and consumer sentiments into 3Q18. For now, we retain our 2018 GDP growth forecast of 3.0% yoy, but there is downside risk of around 0.3% points to bring it to 2.7% yoy.
If overall regional and China-centric trade flows decline, the Singapore economy will likely take a hit due to its dependence on trade and manufacturing activities. Industries most likely affected include the electronics, chemicals, and maritime & shipping industry. For non-manufacturing sectors such as finance, increased market volatility may drive capital flows and flight to quality.
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