Economists Slash GDP Projections

Source : The Straits Times, August 27, 2008

They revise growth to as low as 3.3% on 21.9% slide in July factory output

A DRAMATIC slump in last month’s manufacturing output has forced economists to cut back their growth forecasts for the economy.

Production fell 21.9 per cent - far more than had been tipped by experts compared with July last year. It was also down 1.8 per cent from this June.

This has led economists to slash their gross domestic product (GDP) forecasts, with some tipping growth of as low as 3.3 per cent for the year when, a few months ago, figures of 5 per cent or more were being confidently put forward.

While the speed of the mood change has been striking, the trend from yesterday’s figures is no surprise with the pharmaceutical and petrochemical sectors again the main drags.

Both recorded reduced output, according to Economic Development Board figures yesterday, although the electronics sector managed a small expansion.

With manufacturing accounting for a quarter of the economy, such dips spell trouble for overall economic growth.

‘The manufacturing outcome today adds to the prospect of a technical recession,’ said Standard Chartered Bank economist Alvin Liew. An economy technically slips into a recession when it has shrunk for two straight quarters.

Singapore’s second-quarter GDP fell 6 per cent from the first quarter, although the Government has reiterated it does not expect a technical recession.

This is because construction and services are ’strong pockets of growth’ that should support the economy in the current quarter and next, it has said.

But analysts say the dreaded R-word will be a strong possibility when third- quarter data are out in October.

‘Given the weaker-than-expected July industrial production numbers, we now think there is at least a 40 per cent chance of a biomedical-led technical recession in the third quarter,’ said Citigroup economist Kit Wei Zheng.

Yesterday’s numbers once again pointed to pharmaceuticals as the weak link.

Production dipped 69.7 per cent compared with the same period last year, underlining the 28 per cent year-on-year decline in the second quarter.

The Trade and Industry Ministry has said the sector’s short-term outlook is weighed down by global trends like strong competition from generic drugs and delays in approvals for new pharmaceuticals.

HSBC economist Prakriti Sofat told The Straits Times: ‘We had been expecting a bounce back as pharmaceutical output typically tends to be quite volatile on the account of plant shutdowns for cleaning. However, in recent times, pharmaceutical production has been weak for an extended period.’

Still, economists took comfort in a good showing in electronics output, up 5.9 per cent last month from a year earlier, following a revised 1.5 per cent gain in June.

But with the overall data weak, some economists have trimmed their growth forecasts for the full year.

CIMB-GK economist Song Seng Wun has lowered his number for the full year from 4.6 per cent to 3.5 per cent.

The Government expects growth to be at the lower half of a recently revised forecast range of 4 to 5 per cent.

Mr Song believes the Monetary Authority of Singapore is now more likely to ease the rate of the Singdollar’s appreciation in its next policy statement in October.

OCBC economist Selena Ling has cut her full-year GDP growth forecast to 3.3 per cent from 4.8 per cent to reflect ‘global growth downside risks’.

Some economists query whether the Government is still too bullish on growth. One said: ‘Are there real drivers lending the Government to such optimism?’
United Overseas Bank economist Ho Woei Chen concedes that the construction sector is doing well, but it accounts for a very small part of Singapore’s GDP.
‘Services is still holding up but the risk is that the sector could slow as a result of the synchronised downturn in the United States, European Union and the United Kingdom,’ Ms Ho said.

What remains to be seen, say economists, is whether the Formula One boost to tourism materialises next month, given the huge costs involved and the possible lack of spending by cash-strapped fans.

‘I’m mindful that tourism receipts add up only to close to 6 per cent of full-year GDP based on last year’s numbers,’ said Mr Liew. ‘One event, three days, you do the maths.’