Manufacturing runs out of steam, slowing Q1 growth to 1.3%

Singapore’s economic growth came in below expectations at 1.3 per cent in the first quarter of 2019, slowing again as manufacturing contracted for the first time in three years.

This is the weakest year-on-year quarterly growth since the second quarter of 2009 during the global financial crisis, with economists divided on whether better days lie ahead or global trade tensions could spell a further slowdown.

Amid easing growth, the Monetary Authority of Singapore (MAS) is maintaining the Singapore dollar’s pace of appreciation, while downgrading core inflation forecasts.

Retail sales figures released yesterday also showed an unexpected drop of 10 per cent in February, taking a hit from an earlier Chinese New Year.

However, the Singapore economy is far from a recession, said DBS senior economist Irvin Seah.

The lower flash estimates released by the Ministry of Trade and Industry (MTI) are in part due to a high base of comparison last year and risk-averse behaviour of manufacturers who cut back on buying at the height of trade tensions, said Mr Seah. This means restocking will come, bringing a near-term boost.

Two consecutive quarters of negative growth mark a technical recession, but Singapore has not seen such a drop, he added.

Mr Seah believes the economy has hit the bottom of the growth cycle, with potential for stronger performance in the second half of the year, supported by policy stimulus from China.

While year-on-year growth was sluggish, preliminary numbers for the first three months of this year suggest an improvement from the last quarter, being up 2 per cent quarter on quarter, faster than a 1.4 per cent rise previously.

Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said the first quarter came in below expectations mainly due to a worse than expected manufacturing contraction. The sector shrank 1.9 per cent year on year, a reversal from the first half of last year when it was a prime engine of growth.

But she added that there may be stabilisation ahead, with a recent uptick in domestic manufacturing.

Growth in the first quarter was supported by the services-producing industries, mainly due to the information and communications as well as business services sectors.

The construction sector grew by 1.4 per cent year on year as well after 10 consecutive quarters of decline, supported by private sector construction activities.

ING economist for Asia Prakash Sakpal cautioned that despite improvements, there remain uncertainties because Singapore is dependent on exports amid global trade tensions and an electronics slowdown.

“If these risks intensify further going forward, we may see a further hit to growth,” he said.

Ms Ling added that construction remains unlikely to be a key driver of growth, and the uptick in services momentum, while providing a buffer, is still less than half the pace of this time last year.

“Until we see a bottom and improvement in the China and global growth prospects, the overall picture… remains cautious,” she said.

After two slight increases to the Singdollar’s pace of appreciation, MAS said in its half-yearly review yesterday that it will maintain the current stance, with the width of the policy band and the level at which it is centred also unchanged.

The central bank also downgraded its 2019 forecast range for core inflation to 1 per cent to 2 per cent, down from 1.5 per cent to 2.5 per cent, and economists expect it will not further tighten monetary policy this year.

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