Economy shrinks by 1.1% in Second Quarter 2012

Govt still confident of achieving 1% to 3% growth forecast for year

By Aaron Low, The Straits Times, 14 Jul 2012

SINGAPORE'S economy performed worse than expected in the second quarter as the sluggish world economy took a heavy toll on trade-dependent sectors here.

The local economy shrank 1.1 per cent compared with the first quarter, as the three main engines of the global economy - the United States, China and Europe - faltered in recent months.

This was a sharp reversal from the 9.4 per cent quarter-on-quarter growth recorded in the January to March period.

Comparisons between consecutive quarters are used by economists to gauge the pace of growth, a barometer of economic health.

Manufacturing fell 6 per cent on a quarter-on-quarter comparison, while services inched up 0.4 per cent and construction recorded 0.3 per cent growth.

In year-on-year terms, the economy here grew 1.9 per cent in the second quarter.

Flash estimates released by the Ministry of Trade and Industry (MTI) yesterday showed construction, backed by public infrastructure spending, grew 5.1 per cent in the April and May period year on year. Services grew 1 per cent and manufacturing rose 3 per cent over the same period a year ago.

Trade and Industry Minister Lim Hng Kiang said yesterday that the slowdown was expected.

'But... we are still confident that we can stay within the 1 to 3 per cent growth band that we've forecast,' he told reporters at the opening of a research lab.

'So we're confident that if there is no major blow-up in the European situation, then Singapore should be able to achieve between 1 and 3 per cent growth.'

The local economy's weaker than expected showing follows slower growth in key markets.

China reported that second-quarter growth slowed to 7.6 per cent, its lowest rate in three years, fuelling fears that the mainland economy is on a downward slide for the rest of the year.

Dismal US job creation also pointed to an economy that is fast losing steam while uncertainties over whether Spain and Italy will need full bailouts continue to linger in the euro zone debt crisis.

The unexpected weak showing and murky outlook have led some economists to downgrade their Singapore forecasts for the year.

Citigroup cut its growth outlook to 2.6 per cent from 3.6 per cent.

Said Bank of America Merrill Lynch economist Chua Hak Bin: 'There was hope that Asia could hold its own this year, supported by its domestic demand. But China's and Singapore's growth figures suggest this is not the case.'

He is downgrading his forecast for growth here for the full year from 2.4 per cent to 1.9 per cent.

This, however, is still within the official forecast range of between 1 per cent and 3 per cent.

Nomura economist Euben Paracuelles said the broad-based slowdown 'raises the likelihood of a downward revision of the official forecast range'.

The MTI will release the full set of growth estimates next month, which will provide a more accurate picture of the economy.

OCBC Bank economist Selena Ling said the risks of a technical recession - in which the economy contracts over two successive quarters - has risen.

'The risk of a technical recession, while small, cannot be fully ruled out at this juncture, as much would depend on the external growth environment,' she said.

Dark clouds spell policy dilemma for MAS
Boost to economic growth needed but inflation likely to remain high
By Aaron Low, The Straits Times, 14 Jul 2012

YESTERDAY'S data was a clear sign the economy has taken an unexpected turn for the worse.

The unexpected 1.1 per cent contraction in the second quarter from the first three months of the year left some economists scrambling to downgrade their forecasts.

The sub-par economic performance now poses a potential dilemma for the central bank, which will release its semi-annual exchange rate policy statement in October.

For a while now, the Monetary Authority of Singapore (MAS) has kept a clear focus on fighting inflation, which has been rising strongly over the 18 months.

Since April 2010, the MAS has allowed the currency to appreciate at a faster rate, in a series of monetary policy tightening moves.

The MAS uses the exchange rate to fight inflation, as a stronger Singdollar makes imports cheaper, helping to mitigate the rising global prices of the many goods and services that Singapore imports.

But now economists believe that the focus may need to shift from inflation to dealing with economic growth.

To some extent, this has already been done. In April's monetary policy statement, the MAS, in anticipating a slowing economy, decided to slow the pace of appreciation of the Singapore dollar.

Singapore is not alone is facing this policy dilemma. In fact, other central banks have already started to switch the focus away from inflation to boosting growth amid a global downturn.

Last week, the European Central Bank cut its key interest rate by a quarter of a percentage point to a record low in an effort to boost its sagging economy.

In Asia, China's central bank also lowered its key interest rate for the second time in a month, while South Korea's central bank also unexpectedly cut interest rates on Thursday.

Is it time for the MAS to follow suit and move more aggressively to tackle falling growth rates?

For now, most economists believe the central bank will keep its current stance come October. A big reason for this is because they do not expect inflation to fall as fast as hoped.

OCBC Bank economist Selena Ling noted that although the property market seems to be cooling off, car prices are likely to remain high. Cars and property accounted for the bulk of inflationary pressures over the past year.

But with growth slumping, an increasing number of economists are betting that the MAS could ease monetary policy.

Much will depend on the external economy, said Bank of America Merrill Lynch economist Chua Hak Bin.

'With the debt woes in Europe and the US facing a massive cut in public spending, combined with China slowing, the outlook is much more pessimistic for the rest of the year,' said Dr Chua.

On the local front, the job market remains tight. But worryingly, unemployment has been creeping up. The jobless rate for citizens rose from 3 per cent to 3.2 per cent in the first three months of the year.

Retrenchments are also on the rise and more could come from the financial and manufacturing sectors, said human resource consultancy PrimePartners Management.

The biggest risk, however, is still Europe.

On Thursday, Moody's cut Italy's rating by two notches to Baa2, which is two grades above junk status, in a reminder that the situation there is far from settled.

If the crisis continues to deteriorate and results in contagion in the financial markets, that could plunge Singapore into a second recession in three years.

In that case, the Government may well need to do more than just tweak the exchange rate policy and adopt a much more drastic set of measures to prop up the economy.

It is hoped that there will be no need to go down that path again.

Growth of services hits the brakes
By Melissa Tan, The Straits Times, 14 Jul 2012

THE key services sector expanded in the second quarter at its slowest rate since the 2009 recession with trade-related segments and retail taking a hammering.

Services grew just 0.4 per cent in the three months to June 30, compared with the preceding quarter and were up only 1 per cent from the same period a year ago, based on flash estimates from the Ministry of Trade and Industry (MTI) yesterday.

Services are a good two-thirds of the economy, with manufacturing comprising about 25 per cent.

The MTI cited declines in wholesale and retail trade, finance and insurance, and business services and added that while tourism-related sectors still expanded, their pace of growth slowed.

Said OCBC Bank economist Selena Ling: 'The weakness in the wholesale and retail trade is a clear reflection of the regional growth momentum also moderating, especially in China, which contributes significantly to our visitor arrivals.'

The MTI said lower stock market trading activity weighed down the finance and insurance sector and business services contracted because of a 'slowdown in professional services-related activities'.

Business services such as law and accountancy are 'significantly tied to trade and financial activity', said Barclays Capital economist Leong Wai Ho.

Both sectors could stay depressed for a few more months as 'these dampening effects' from the financial market volatility are likely to extend into the third quarter, added OCBC's Ms Ling.

Even the bright spot of tourism is faltering. Bank of America Merrill Lynch economist Chua Hak Bin said tourism arrivals grew only 8.9 per cent in April compared with 13.5 per cent in January. 'Retail spending on watches and jewellery contracted in May, suggesting that high-end tourism spending may also be waning.'

However, Dr Chua said: 'Recent manpower surveys point to continued resilient hiring demand across most services segments with perhaps the exception of financial services... We would become a lot more worried if the overall services sector started shedding jobs.'