MTI Credits Diversification For Strong Q2 GDP Growth

Source : The Business Times, August 11, 2007

Gains in biomedical and transport engineering more than make up for slack in electronics

Despite risks on the horizon, the Ministry of Trade and Industry is confident that the Singapore economy's strong first-half momentum - notably the robust 8.6 per cent second-quarter pace - will see it through the year.

The 8.6 per cent GDP growth - 0.4 of a point better than the advance estimate and 0.6 of a point higher than the market consensus - amounts to a blistering 14.4 per cent pace in seasonally adjusted, annualised terms. It is the fastest rate in eight quarters.

At a media briefing yesterday, MTI second permanent secretary Ravi Menon told 'the story behind the numbers' - how Q2's broad-based growth reflects a well-diversified economy - and fielded questions about the impact of the US sub-prime woes.

Both financial services and construction clocked up double-digit growth in Q2 (the building sector's 17.6 per cent rate is almost a decade-high), while manufacturing recorded healthy expansion despite an electronics downturn.

'One of the most exciting things about the current GDP cycle is how well the economy has done despite the slump in electronics,' said Mr Menon. 'Ten to 15 years ago, this would not have been imaginable.'

Now, strong growth in the biomedical and transport engineering industries has more than made up for the slack in electronics.

Financial services is seeing growth across credit-related and wealth advisory services, and construction growth is strong not only in the residential market but also the commercial and industrial segments.

'This broad-based growth momentum across the major sectors and within the sectors is one of the reasons for our higher (GDP) forecast of 7-8 per cent for this year,' Mr Menon said.

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MTI press release: Improved Outlook for 2007 As Growth Broadens and Economy Diversifies

The driving factors behind the higher forecast are diverse, he pointed out.

First, strong global demand for biomedical, aerospace and marine industry products, 'all not highly correlated with one another'.

Second, robust regional demand for financial services. And third, a buoyant domestic property market fuelling the construction sector.

'With greater diversification, the economy is becoming more resilient and less volatile in the face of industry-specific shocks,' Mr Menon said.

In any case, the official growth forecast does take into account the key growth risks - namely negative shocks from the US housing market and an oil supply crunch. 'The situation in the US credit market remains the most significant risk on the horizon,' Mr Menon said.

A general risk aversion could spread to other financial markets, and if that translates into increased volatility, consumption and investment growth could be hit globally, he said. So far, this scenario has not played out.

'Our sense is that if the situation worsens, it'll be some time before it creeps into the real economy,' he said. So, going just by the first-half momentum, 7-8 per cent growth for Singapore looks to be in the bag.

As HSBC economist Robert Prior-Wandesforde notes, even if GDP growth were flat in second-half 2007, the full-year average pace would still come to 6.9 per cent. An 8 per cent quarter-on-quarter pace annualised rise in Q3 and Q4 would produce 8.5 per cent for the year - well above the official forecast.

While HSBC is staying with its 8 per cent forecast for 2007 and 2008 pending 'further clarity on the fallout from the US sub-prime crisis', the risks, 'at least for this year, are once again on the upside', said Mr Prior Wandesforde.

Another economist, CIMB-GK Securities' Song Seng Wun, is also keeping his 7.5 per cent growth forecast for the year despite the risks. 'As long as we continue to see job and income growth, there should be sustained growth in domestic demand,' he said.

Indeed, private consumption finally perked up in Q2, growing 5.8 per cent, while investment surged by 26 per cent.

And the leading indicators bode well: The composite leading index rose 3.4 per cent in Q2 from Q1, and 8 per cent year-on-year.