Why the pressure is up for Singapore's services sector

It's been going downhill for over 2 years.

According to DBS, first quarter advance GDP estimates and the MAS monetary policy review are the key things to watch for this week. The headline growth number is likely to report an expansion of 3.7% QoQ saar, just slightly better than a 3.3% pace recorded in the previous quarter.

On a yearly basis, that translates into a 0.5% YoY rise, down from 1.5% in 4Q12. However, downside risk to our forecast remains due to the poor industrial and export performance in the first two months of the year, which are massively distorted by technical, seasonal and industry specific reasons.

Here's more from DBS:

A rebound in March manufacturing and export number is expected, judging from the recent turnaround in the PMI numbers. Singapore’s overall manufacturing PMI hit a 22 months high of 50.6.

Nonetheless, the crux of the issue lies in the performance of the services sector. This sector accounts for about 60% of the overall economy.

Historically, the performance of the economy is closely tied to it. If services turns, the economy turns along with it. And on a YoY basis, growth performance of the services sector has finally turned around in the previous quarter, after being on the decline for more than 2 years.

As long as growth of this sector continues to improve, overall GDP will continue to expand. Moreover, global economic conditions have been improving.

While pockets of risk remain in Eurozone, the US economy is recovering while growth momentum across Asia is likely to pick up pace in the coming quarters.

This essentially implies growth trajectory of a slower first half, followed up a pick-up in the second half of the year for the Singapore economy.

With inflation still high (4.9% in Jan13) and growth outlook improving, the monetary policy stance is likely to remain status quo.

The MAS is expected to maintain the current slope, width and centre of the Sing NEER policy band in the upcoming review to balance out the risks on inflation and growth.

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