Economics SG: risks beneath the GDP figures

Transcription

1 Economics SG: risks beneath the GDP figures DBS Group Research 18 August 216 Headline growth has been weak. Things may be worse under the hood Two consecutive quarters of contraction in the services sector means that two-thirds of the economy is in technical recession If the biomedical cluster is excluded, the manufacturing sector will not be able to pick up the slack from services While further monetary easing is unlikely, one should expect an expansionary budget in FY17 Second quarter growth was weaker than expected. A closer scrutiny of the most recent set of GDP figures revealed that there are more risks underneath. On thin ice GDP growth for the second quarter was revised down to.3% (QoQ saar), from the advance estimates of.8% (Table 1). In addition, the corresponding figure for the first quarter was also lowered to.1%, from.2% previously. With just an average of.2% growth on a sequential basis in the first half of the year, the economy is weak (Chart 1). A negative shock from the external environment could tip the economy into contraction. The worst is yet to come Separately, although the headline year-on-year figure has averaged 2.1% in 1H16, this came partly on the back of the low base in the same period last year (Chart 1). The opposite will occur in the coming two quarters since GDP accelerated in the second half of last year, particularly in the fourth quarter. Such high base effect essentially implies that the worst is yet to come in year-on-year terms. Expect the headline figure to fall sharply in the next two quarters. In fact, that also explains why the government lowered its official forecast range to 1-2%, Table 1: GDP growth by sectors 2Q1 3Q1 4Q1 21 1Q16 2Q16 Percentage change year-on-year Overall GDP Manufacturing Construction Services producing Quarter-on-quarter annualised growth rate, seasonally adjusted Overall GDP Manufacturing Construction Services producing Irvin Seah (6) irvinseah@dbs.com 1

2 Chart 1: GDP slowed in 1H16 % YoY, % QoQ saar 8 %QoQ saar high base %YoY 1.8%.3% DBSf -2 low base on thin ice Mar-14 Sep-14 Mar-1 Sep-1 Mar-16 Sep-16 which is below the average growth rate of 2.1% YoY thus far. We continue to expect 1.% growth for the full year. And this will be the slowest in seven years. Technical recession The focus is on the decline in the services cluster. The sector has registered two consecutive quarters of contraction, which means that it is technically already in a recession (Table 1). Services sector accounts for slightly more than two-thirds of GDP and employment [1]. So literally, two-thirds of the economy is already in a technical recession given the services slump. Two-thirds of the economy already in technical recession The bigger concern is that if the doldrums in the services sector persist, it could eventually drag the entire economy down. Note historically the sector has always been the key driver of growth in Singapore. When the services sector turns, the economy follows (Chart 2). Plainly, risk of a contraction in GDP has risen. If there is hope that the manufacturing sector could pick up the slack in the services sector, such optimism may have been misplaced. The manufacturing sector grew an average of just.3% YoY in 1H16. And that paltry pace of expansion was largely driven by the biomedical cluster (Chart 3). Without the jab in the arm from biomedical, overall manufacturing sector would have contracted by 2.7% YoY in the first half of the year instead. Given the volatile Chart 2: Historical GDP and services sector growth % YoY 2 GDP growth 2 Services growth 1 - Mfg recession AFC Dot.com - GFC

3 Chart 3: Manufacturing lifted by biomedical % YoY 2 Biomedical IP Overall IP Overall IP ex-biomed - -1 Mar-14 Sep-14 Mar-1 Sep-1 Mar-16 nature of the biomedical cluster, as well as the fact that it has little positive spin-offs to the rest of the economy, outlook for the overall manufacturing sector remains dicey amid the weak global demand. MAS to remain status quo Policy implications With growth outlook likely to remain dim, there will be expectation that policies may become more accommodative. However, the Monetary Authority of Singapore (MAS) had already eased the exchange rate policy to a zero appreciation of the Sing NEER in April, from a modest appreciation stance previously. And this was despite the fact that the headline figures did not show a contraction in the economy yet. The point to note is that the shift in monetary policy stance was pre-emptive in nature and it was meant to guard against further downside risk to growth and that inflationary pressure had also been less than anticipated. In our opinion, the current monetary policy stance already served as a cushion for the economy and is appropriate under the current economic conditions. From a technical perspective, the Sing NEER is still hovering nicely in the upper half of the policy band and is not under any downward pressure (Chart 4). Barring any unforeseen negative shock in the external environment, the central bank will most likely stick to status quo in the upcoming policy review in October. Chart 4: DBS SGD NEER and policy band 1 Indexed: 2- Apr 212 = Latest: 16 Aug16 Zero appreciation SGD NEER Lower limit Mid-pt Upper limit

4 An expansionary budget in FY17 Furthermore, there were suggestions by some observers of a possible fiscal stimulus / off-budget measures to prop up the economy after the disappointing 2Q16 GDP figures were announced. It pays to note that there is only about six months left in the current fiscal year. And administratively, this is the first financial year for the new term of government and it is important for the fiscal department to keep their powder dry in case of rainy days ahead [2]. As such, an expansionary fiscal policy is more likely in the upcoming Budget 217. The extent of fiscal impetus will depend on how economic conditions pan out in the coming months as well as the medium term outlook for the economy. Notes: [1] The services sector accounts for 69.2% of GDP and 71% of total employment in 21. [2] Budget 216 is expected to report an overall fiscal surplus of SGD 3.4bn. See MOF Budget 216 and SG budget: balanced and transformative dated 28 Mar16 for more details Sources: All data are sourced from DOS, CEIC and DBS. 4

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