Manufacturing slump cuts GDP growth to just 1.7%

Manufacturing fell 13.5% in signs the economy is softening.

DBS expects an average contraction of 7% in manufacturing growth this quarter.

Here’s more from DBS:

Advance GDP growth figures for 2Q11 will be announced this Thursday and market is bracing itself for a poor set of numbers. Headline growth should clock a paltry 1% QoQ saar and 1.7% YoY expansion based on our estimation although risk is that there could even be an outright contraction in growth. Downside risks to growth have heightened significantly in the second quarter. Apart from the spillover effects of high oil prices arising from the political crisis in MENA in the first quarter, the calamities in Japan as well as the re-emergence of sovereign debt problems in Europe have dealt severe blows to growth momentum in the second quarter.

Overall manufacturing output in Apr-May11 averaged a decline of 13.5% YoY. While we believe industrial output growth will recover in June, an average contraction of about 7% in manufacturing growth can be expected in the quarter. This is in stark contrast to a stunning 13% surge in manufacturing output in the previous quarter.

Beside high base effect, electronics supply chain disruption coincides with temporary shut-downs in some pharmaceutical plants are the key reasons behind the poor manufacturing
growth figure.

Separately, some degree of moderation can also be expected from the services sector.
Growth is likely to ease to 5.8%, from 7.3% in the first quarter. Weakness in external demand and the associated dips in manufacturing output and exports are likely to spill over to the wholesale trade and transportation service industries. Earlier property market cooling measures are expected to take a toll on real estate services while volatilities in the financial markets will impact financial services growth. Perhaps the only bright spark within the services sector will come from tourism related industries.

A steady inflow of tourists, averaging about one million a month on account of the two integrated resorts, will at least provide some support to the services sector in the quarter.

The construction sector should see a modest improvement in growth to 2.9%, up from 2.4% previously. Steady increase in payment for public infrastructure projects is offsetting the decline from private sector projects while the low base last year has also helped. Yet, the outlook for the construction sector remains uncertain with cooling property market and increasingly higher material and labour costs.

Overall, a better than expected first quarter growth has essentially been squared off by the poorer performance in the second quarter. But recent data from Japan, Eurozone, US and Asia are suggesting that the current deceleration will be temporary. If global growth momentum does pick up as widely expected, consensus will surely inch even nearer to our long held growth forecast of 7% for the year. But much will really depend how the economic situation pans out in the coming months. For now, 7% growth is still good despite this current dip in the second quarter.

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