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ECONOMY | Staff Reporter, Singapore
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What does Singapore's 6.2% industrial production growth imply for the rest of 2014?

Analysts are delighted by it.

According to DBS, headline industrial production index for December posted a robust expansion of 6.2% YoY when consensus was expecting a contraction of about 1.4%. This surprising news got analysts thinking that good days are about to come for Singapore. Here's what they said about it:

DBS Group Research:

IP index was posted at 6.2%. What a massive surprise!

The continued strong performance in the electronics cluster was probably priced in. But a simultaneous surge in output from the biomedical and transport engi¬neering clusters probably caught everyone off-guard. Well, that’s the amazing nature of this economy. It’s small, open and extremely volatile. This is probably one of the things that makes an economist’s job here so interesting.

In absolute index basis, this is the highest level of industrial output since Mar 08! And the production number for the previous month has also been revised sig¬nificantly higher. So what does that imply? Well, manufacturing growth for the fourth quarter will now be revised to 7.0% YoY instead of 3.5% as previously reported in the advance estimate. Yes, that’s a doubling of the manufacturing growth number.

More importantly, the GDP growth figures for 4Q13 will see some massive up¬ward revisions as well. Once again, the earlier projection of a contraction of 2.7% QoQ saar will get revised to an expansion of about 1.7%. That’s a full 3%pt revision! In year-on-year basis, it’ll be 5.5% YoY rather than 4.4% for the quarter. That’s a full percentage point higher. So, this will effectively bring full year GDP growth closer to 4.0% rather than the earlier estimate of 3.7%.

Matt L Hildebrandt, analyst, JPMorgan Chase Bank, N.A., Singapore Branch:

Singapore is one of the most open economies in the world. Traditionally, external demand has driven GDP growth as export and financial market trends lead domestic dynamics. But, between 2011 and 2013, Singapore's growth drivers shifted: domestic demand drove the economy while the contribution from net exports was very modest, if not a drag. Low interest rates, strong credit and housing cycles, and tight labor market conditions (partly due to stricter immigration policies) enabled domestic demand to remain resilient despite soft external conditions.

However, the drivers of economic growth are now shifting back to externally driven factors. Fed tapering and government policy have led to tighter domestic monetary conditions, slower credit growth, and more stable housing prices, all of which will weigh on domestic demand. Tight labor market conditions are forecast to persist in 2014 and domestic demand is expected to contribute to growth this year, but net exports should retake its place as the economic engine of growth.

After slowing to 1.3% in 2012, Singapore’s economy grew an estimated 3.7% in 2013. Much of this strong growth pace reflected the one-off 17.4% (annualized) growth spurt in 2Q13 but activity has generally been stronger in recent quarters relative to 2012 even if that one quarter is excluded. In 2014, the economy is forecast to grow 4.1% as stronger G3 demand translates into faster GDP growth. Given Singapore's high-beta relationship with the global economy, growth would be forecast at an even faster pace were the domestic demand dynamics discussed above not expected to restrain domestic activity.

Due to changes in immigration policy in recent years and the restructuring policy underway, Singapore’s potential growth rate is widely believed to have slowed from an estimated 3%- 5% range to 2%-4%. We think that potential growth is still in the top end of that range (3.5%), which means that a growth rate of 4.1% this year will keep the output gap modestly positive in 2014 (and 2015), with risk to the upside if global growth proves stronger than expected or if domestic activity constraints prove to be less of a drag than expected.

Enrico Tanuwidjaja and Euben Paracuelles, analysts, Nomura:

Industrial production (IP) surprised on the upside at 6.2% y-o-y (Consensus: -1.4%, Nomura: 4.0%) in December on a pick-up in the electronics sector (22% y-o-y from 11% in November). Across the electronics sector, the improvement was broad-based as production of all key components – semiconductors, computers and data storage – improved.

The biomedical cluster, however, continued to fare badly, contracting by 14.9% in December from -1.8% in November, led by a decline in pharmaceuticals output. For Q4, IP grew 7.0% y-o-y, putting clear upside risk to the 4.4% advanced GDP estimate. For 2013, IP growth of 1.8% is a clear improvement from just 0.5% in 2012. Given the upside surprise in the December IP numbers, we expect full-year 2013 growth to be revised up to 3.9% from the flash estimate of 3.7%.

We expect the continued tightness in the labour market (the seasonally adjusted unemployment rate in Q4 2013 hit a low of 1.8%) to cap growth potential, while the outlook for slower growth in Indonesia and Thailand is also likely to affect Singapore growth this year. Finally, the official 2014 forecast for non-oil domestic exports remains unchanged at a low 1-3% range. As such, we expect growth to come off from last year, with our 2014 forecast at 3.5% (mainly on stronger services output) coming in at the top bound of the Monetary Authority of Singapore‟s 2.5-3.5% projection.
 

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