Economy May Rebound After Sharp Year-End Dip

Source : The Business Times, January 3, 2008

Flash GDP estimates confirm Q4 wobble; coming quarter may be different

Following its sharp slowdown towards the end of 2007, the Singapore economy could well stage a strong rebound in the first quarter this year, say the more upbeat economists.

Flash GDP estimates for Q4 2007 - based only on October and November data - have the economy growing only 6 per cent, down from Q3's slightly upgraded 9 per cent and the lowest quarterly rate since Q1 2005. Market forecasts for Q4 GDP growth ranged between 7 and 8 per cent.

Against the preceding Q3 and against expectations, the economy slipped into the red, contracting 3.2 per cent in Q4 in annualised, seasonally-adjusted terms. It is the first q-o-q fall since Q2 2003.

Full-year 2007 growth - as the Prime Minister announced in his New Year message - turned in at 7.5 per cent, at the low end of the 7.5-8 per cent official forecast, rather than 'closer to the upper end' as the Ministry of Trade and Industry had expected back in November.

But Q4's big dropoff in growth - compared to the first three quarters' 8 per cent average - should not come as a huge surprise, given the indications from October and November's manufacturing, trade and retail figures, even if these have sometimes proved to be misleading signals.

Export and industrial output numbers for early- Q4 were weakish, while retail sales have not quite reflected a buoyant job market with booming bonuses and increments.

But notably, Q4's poor manufacturing performance - only 0.5 per cent growth, according to the early figures, and the main drag on GDP - came largely off scheduled pharmaceutical plant shutdowns.

The transport engineering industries continued to notch double-digit growth in Q4, MTI said. Given the virtual 'boom-bust' volatility of pharmaceutical output, economists say they are more concerned about the electronics sector, which is more vulnerable to an external slowdown. United Overseas Bank's economists expect 'moderate' manufacturing growth in the first half of 2008, after an estimated 5.6 per cent 2007 pace.

The more domestic-oriented construction and services industries fared well in Q4, according to the advance estimates.

Say Goldman Sachs economists: 'For 2008, we still expect domestic demand to remain robust but see downside risks to our GDP growth forecast of 7.3 per cent, especially if the exports trend continues to remain weak.'

But HSBC's Robert Prior-Wandesforde points out that Singapore's latest exports to the United States have actually improved.

In any case, the Q4 downturn here is not due to US economic weakness, he says, as the US economy actually picked up strongly in Q3.

He believes that retail spending in Singapore will 'soon improve' and expects to see GDP 'bounce back strongly' in Q1, and is happy to stick to an above-consensus GDP growth forecast of 7.3 per cent.

'The bottom line is that the fundamentals still look extremely strong in most areas and not just in terms of the coincident labour market data but the underlying policy stance as well,' says Mr Prior-Wandesforde. Interest rates are at 'multi-decade lows', fiscal policy is neutral to slightly expansionary, and the Singapore dollar has appreciated 'only marginally' over the last year, he notes.

Morgan Stanley's economists also see 'stable momentum' in Q1, but expect GDP growth to slow to 5.8 per cent in 2008 with the global slowdown. They also reckon that a domestic demand buffer in the form of a construction boom should limit the downside risks.

Goldman Sachs' team sees fears of higher inflation outweighing growth concerns and still expects a move to a tighter monetary policy stance in April.

OCBC Bank's treasury economist Selena Ling, on the other hand, reckons that the GDP slowdown should dampen speculation about any shift to a more aggressive policy stance ahead of the April review.

Meanwhile, the next key data is the December industrial output due out in late January. 'Should the December IP growth come in stronger than one per cent, we can expect some upward revision to the Q4 2007 and full-year GDP growth,' says United Overseas Bank's Ho Woei Chen. For now, its 2008 growth forecast stands at 6.3 per cent.