Analysts Play Catch-Up As Economy Stays Hot

Source : The Business Times, October 11, 2007

They bump up forecasts following Q3 flash estimates of 9.4% growth

The Singapore economy continued to power ahead in the third quarter, prompting several research houses to raise their growth forecasts for the whole year.

Flash estimates released by the Ministry of Trade and Industry (MTI) showed that the economy grew a sterling 9.4 per cent year-on-year last quarter, based on data from July and August. This is higher than the median forecast of 7.8 per cent among private sector economists polled by the Monetary Authority of Singapore recently.

The performance was fuelled by broad-based expansion across various sectors. The construction industry moderated to a growth of 15.5 per cent in Q3, from 18.8 per cent in Q2. And despite a lacklustre performance from the electronics cluster, the manufacturing industry managed 12.3 per cent growth, picking up momentum from the 8.3 per cent year-on-year gain in Q2. This was underpinned by the strong biomedical and transport engineering clusters.

The services sector eased to a 8.1 per cent gain, from 8.4 per cent in Q2. 'Our sense is that financial services, information and communications as well as hotels and restaurants outperformed during the quarter,' said Citigroup economist Chua Hak Bin. 'Some modest slowdown was detected for wholesale and retail trade and sea transport activities.'

On a quarter-on-quarter, seasonally adjusted annualised basis, real GDP growth decelerated to 6.4 per cent from 14.4 per cent in Q2.

The headline figure takes the growth rate for the first nine months to 8.2 per cent, exceeding the official forecast of 7-8 per cent for the full year. Several economists that BT spoke to said that they were revising their full-year growth estimates, with one going as high as 8.7 per cent.

'Although the advance estimates are below our expectations, we believe once the full set of data is in, 3Q '07 GDP could be revised up to the 10 per cent level, as year-to-date growth is already 8.2 per cent,' CIMB-GK research head Song Seng Wun wrote in a report yesterday. 'Hence, we are actually raising our full-year growth estimate from 7.5 per cent to 8.7 per cent.'

The team at Citigroup has upgraded its 2007 growth forecast to 8 per cent, from 7.2 per cent previously. Similarly, Standard Chartered Bank economist Alvin Liew is raising his forecast to 8 per cent, from 7.6 per cent, while UOB is looking at 8.4 per cent growth for the full year.

'The preliminary estimate for manufacturing growth of 12.3 per cent year on year in 3Q factors in a modest 2 per cent year-on-year growth in the industrial output for the month of September after 18.1 per cent year-on-year expansion in July-August,' said a UOB report. 'This suggests that actual GDP growth for the quarter could potentially surprise on the upside should the biomedical sector continue its robust expansion in September.'

While many are keeping an eye on rising prices, some said that the risks of the economy overheating are low - at least for the time being.

'If you look at asset prices, inflation, wage increases in the last two quarters, there does seem to be some risks of overheating,' said Stanchart's Mr Liew. 'But I don't foresee an overheating situation, at least for the next three quarters until mid-2008.

'For one, we can see that there's a lot of domestic driven activities. And even though we had achieved fairly high growth, the manufacturing sector isn't the one that's pushing it. So it's not an export-oriented kind of growth story this time round.'

UOB economist Ho Woei Chen said that the risks of overheating could be tempered by the slowdown in the US economy. 'We are not so concerned about overheating because there's some downside risks to the global growth outlook going forward,' she said. Besides, the steeper appreciation of the S$NEER slope, announced by the MAS yesterday, could help cap imported inflation to a certain extent, she added.

HSBC, which last week cautioned against an overheating Singapore economy, is maintaining a growth estimate of 8.5 per cent. In a report titled Easy, tiger, it argued that the economy is showing signs of overheating, with wages rising at a seven-year high of 8.5 per cent, office rents jumping 50 per cent, and the consumer price index hitting a 12-year high.

Citigroup's Dr Chua also suggested overheating pressures were looming. 'Tightness is apparent in labour and property markets, with wage costs, office rents and residential rents all rising strongly,' he wrote in a report on Monday.

The market probably reacted on fears that there may be more tightening measures ahead, following an adjustment to the S$NEER slope yesterday. The Straits Times Index shed more than 50 points to end the day's trading at 3,814.45.

'The market has also run up quite considerably,' said Dr Chua. 'I suppose there may be some concerns as well that a stronger Singapore dollar could probably hurt exports. So it's a combination of factors.'