Singapore Q2 GDP contracts, raising doubts on growth outlook

Singapore’s economy shrank more than expected in the second quarter, hurt by a sharp drop in manufacturing output and raising doubts as to whether the central bank will continue to let the local dollar appreciate at the current pace.

The Southeast Asian city-state’s gross domestic product (GDP) declined 7.8% in the second quarter from January-March on an annualised and seasonally adjusted basis, the Ministry of Trade and Industry said.

The contraction was worse than the 1.9% decline forecast by economists polled by Reuters last week and was the first quarterly drop since the economy shrank 16.7% in the third quarter of last year.

 

The second-quarter drop was largely due to declines in highly volatile pharmaceutical production and by a high base effect when compared to strong growth early last year.

 

Still, the worse-than-expected reading comes amid signs that global economic growth is slowing and increased worries about the Western world’s sovereign debt problems, with Moody’s downgrading Ireland to "junk" status and warning the United State may lose its top-notch credit rating.

 

“Manufacturing is sputtering. What is also slightly worrying is that services are slowing much faster than what we had expected,” said Bank of America-Merrill Lynch economist Chua Hak Bin, who cut his full-year GDP forecast for Singapore to 4.8% from 5.3%.

 

“The growth forecast of 5-7% that the government has is looking a bit too positive and given that inflation has come off its peak, the risk has shifted somewhat towards normalization of policy,” he added.

Singapore, which manages monetary policy through the exchange rate, has let its currency appreciate nearly 5% against the U.S. dollar since the start of the year, the most in Asia after Korea, Taiwan and Malaysia.

 

The currency hit a record high against the U.S. dollar earlier on Thursday.

 

The Monetary Authority of Singapore (MAS) will release its next half-yearly monetary policy statement in October.

 

Since early 2009, when the global economy began to crawl out of the worst recession in 80 years, investors have piled up bets that the Singapore dollar will strengthen, Reuters asset allocation polling data shows.

 

Last year, export-focused Singapore recorded one of the highest GDP growth rates in the world at 14.5% on the back of strong growth across Asia, but especially in China, India and Indonesia.

 

This year, first-quarter growth was strong. On Thursday, the government revised Q1 figures upward to an expansion of 9.3% year-on-year and 27.1% quarter-on-quarter.

 

However, sentiment has shifted recently, suggesting some in the market think the Singapore dollar’s rise will moderate.

 

David Cohen of Action Economics said that with inflation starting to come off its highs earlier this year, the MAS will be less inclined to let the currency strengthen at the current pace.

 

“The data would allow MAS to be more patient in terms of further steepening the trajectory of the Singapore dollar,” he said.

A SOFT PATCH?

Credit Suisse, in a note to clients, said it still expects Singapore’s economy to grow by 6.5% this year despite the weaker-than-expected second-quarter GDP data.

 

“The fundamentals point to a soft-patch rather than anything more serious,” it said.

 

The Swiss bank said Singapore’s GDP data tended to be choppy because of the sharp production swings in the city-state’s pharmaceutical sector that makes up about a third of manufacturing.

 

Singapore’s manufacturing sector contracted 22.5% during the second quarter on an annualised and seasonally adjusted basis after a growing a revised 96.6% in the first quarter.

 

Services, meanwhile, contracted 2.9% after a 10.3 percent expansion in the first three months. 

 

“This is the third quarter-on-quarter GDP contraction Singapore has experienced since the end of the global financial crisis... While this might sound terrible, it actually says more about the huge volatility of the economy over recent years than anything else,” Credit Suisse said.            

 

While growth sputters in the West, the news in Asia has been more positive with China reporting faster-than-expected GDP growth on Wednesday and the widely followed Reuters Tankan survey on Thursday showing a rise in confidence among Japanese companies.