Singapore apparently vulnerable to global economy fluctuations

Facts
According to advance estimates, Q2 GDP growth eased to 0.5% y-o-y (vs. an upwardly revised 9.3% in Q1 2011) and contracted by 7.8% q-o-q SAAR (vs. an upwardly revised +27.2% in Q1). This was well-below consensus/our forecast of 1% y-o-y and 0% q-o-q SAAR. The upward revisions to Q1 data pertained to both the manufacturing and services sector, while the numbers for construction were left broadly unchanged.

The disappointing Q2 growth numbers were, primarily, the result of weakness in the manufacturing sector, dropping by 5.5 % y-o-y (vs.+16.4% in Q1) and tumbling 22.5% q-o-q SAAR (vs. +96.6% in Q1). The nosedive in manufacturing was primarily by the pharmaceutical sector due to changes in product mix (to lower value-added stuff) and the electronics sector, blown backwards by global economic headwinds.

The construction sector saw growth holding up relatively well, up by 1.6% y-o-y (vs. 2.4% in Q1) and 13.8% q-o-q SAAR (vs. 13.5% in Q1) led by buoyant activity in the industrial building segment.

Service sector activity also softened, with services rising just 3.3% y-o-y (vs. 7.6% in Q1) and declining 2.9% q-o-q SAAR (vs.+10.3% in Q1), with growth dragged down by whole sale & retail sales (due to weaker trade flows) and financial services (partly due to a drop in stock trading activities). However, tourism-related services continued to benefit from the constant flow of tourists flocking to the city state.

Implications
The softness in the global economic cycle has clearly hit Singapore’s high beta economy. While we had anticipated the direction, we had certainly underestimated the degree of the softness.

Of course, part of the softness relates to our fickle friend, pharmaceuticals, which could quickly and ferociously bounce back in Q3. Moreover, these are advance estimates based mostly on April-May data and there is a possibility that they could be revised up, especially if pharmaceuticals in June bounce back more than currently assumed by MTI.

All that being said, this very much is a story about global economic weakness and how vulnerable Singapore naturally is to global ups and downs. Part of the global story, as we have discussed many times before, is temporary in nature, with the supply-chain disruption related to the Japan natural disaster already beginning to dissipate and the global inventory correction also expected to prove temporary in nature. However, the global slowdown goes beyond that, reflecting also the negative impact on final demand in advanced economies from the elevated fuel prices, although they are now coming off.

In our baseline scenario, we still assume that the temporary factors dominate the global story and the global economy will pick up pace in the second half of this year, helping to pull Singapore up through favorable trade and financial flows. With growth in China also holding up well, as we saw from yesterday’s data dump, this should also provide some cushion. But, the risks to this outlook have clearly tilted more to the downside with the extension and intensification of the European sovereign debt saga, which ultimately could prolong and worsen the global soft patch

Factoring all of this in, our full-year growth forecast for Singapore of 6.2% y-o-y is evidently “in danger” and it is now more likely that we may end up closer to the lower end of the government’s forecast range of 5-7%. As things stand now, this could help ease capacity constraints in the economy and, thereby, inflation pressures, assuming that the advance estimates do not significantly exaggerate the slowdown and the global soft patch is prolonged. In turn, this would make it less likely that the MAS would have to tighten again in October.