Chart of the Day: Why we can forget fears of another GDP contraction for now

Thank heavens for that.

Singapore's beaten manufacturing segment is becoming a beacon of hope for the time being, as the 4% predicted expansion could stop a sequential shrinkage in the GDP numbers.

According to Morgan Stanley, 2Q14 GDP advance estimate came in at +2.1%YoY (vs a downwardly revised +4.7%YoY in 4Q13). This is lower compared to consensus and Morgan Stanley expectations of +3.1%YoY and +2.7%YoY, respectively.

Here's more from Morgan Stanley:

On a sequential seasonally adjusted annualised basis, the economy contracted -0.8%QoQ saar (vs +1.6%QoQ saar in 1Q14).

In terms of segments, the weakest performance was in the manufacturing sector, which contracted sequentially at -19.4%QoQ, saar (vs +12.2%QoQ saar in 1Q14), leading %YoY to register an almost flat +0.2%YoY (vs +9.9%YoY in 1Q14).

Meanwhile, %YoY momentum in services and construction both moderated to +2.8%YoY (vs +3.9%YoY in 1Q14) and +5.0%YoY (vs +6.4%YoY in 1Q14).

This is in line with what high frequency monthly indicators were suggesting but from a QoQ sequential basis, both services and construction reversed from the negative showing in 1Q14, rebounding +5.2%QoQ saar (vs -1.4%QoQ saar in 1Q14) and +2.6%QoQ saar (vs -0.5%QoQ saar in 1Q14). respectively.

Policymakers had commented that the weakness in manufacturing was due to the electronics segment. In particular, firm-specific issues have resulted in production cut-back and impacted electronic production which has declined -14.7%MoM/-7.6%YoY and -2.9% MoM/-7.5%YoY in Apr-14 and May-14, respectively.

The impact from the production cutback is expected to stay in the %YoY numbers. However, to the extent to which the weak numbers are due to “supply-side” factors rather than poor demand per se, we suspect the sequential contraction is unlikely to persist.

Indeed, MTI’s +0.2%YoY 2Q14 advance estimate for manufacturing suggest that manufacturing is expected to expand +4.0%MoM in Jun-14. Hence at this stage, we do not expect 3Q14 GDP numbers to show a second consecutive quarter of sequential contraction.

That said, with 1H14 GDP tracking at +3.4%YoY on today’s advance estimate, given that the supply-side impact on manufacturing production will stay in the %YoY numbers and given that base effects would be more difficult in 2H14, we think there are downside risks to our 2014 GDP growth numbers of 3.9%YoY.

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