Singapore economy shrinks but avoids recession in 2012

By Linette Lim, Channel NewsAsia, 12 Oct 2012

Singapore's economy grew by 1.3 per cent on a year-on-year basis in the third quarter of 2012, compared to a 2.3 per cent growth in the previous quarter.

On a quarter-on-quarter basis, the economy contracted by 1.5 per cent, a reversal from a growth of 0.2 per cent in the second quarter.

Releasing the advance GDP estimates for the third quarter on Friday, the Ministry of Trade and Industry (MTI) said the Singapore economy remains on track to grow by 1.5 to 2.5 per cent in 2012.

It said economic growth in the second quarter was better than expected, resulting in an upward revision of quarter-on-quarter annualised growth from the preliminary estimates of -0.7 per cent to 0.2 per cent.

Commenting on the various sectors, MTI said the pullback in quarter-on-quarter growth momentum in the third quarter was mainly due to contraction in the manufacturing sector.

The sector declined by an annualised rate of 3.9 per cent, following the 0.1 per cent contraction in the preceding quarter. This largely reflected the decline in output of the electronics cluster.

On a year-on-year basis, the manufacturing sector grew by 0.7 per cent compared to the 4.6 per cent increase in the preceding quarter.

The construction sector grew by 8.6 per cent on a year-on-year basis in the third quarter, moderating from 10.1 per cent in the previous quarter. On a quarter-on-quarter basis, the sector contracted by an annualised rate of 7.5 per cent due to a decline in private sector building activities.

Services producing industries rose by 1.1 per cent on a year-on-year basis, following the 0.9 per cent growth in the previous quarter. On a quarter-on-quarter basis, the services producing industries grew by an annualised rate of 0.1 per cent, compared to the 0.4 per cent decline in the preceding quarter.

Looking ahead, Leong Wai Ho, senior regional economist at Barclays Capital, said: "Growth should rebound in the fourth quarter, led by manufacturing - the same segments that pulled us down in Q3 will fire back up again. The drop in Q3 was due to lumpy items so the recovery of these lumpy items could push up IP (industrial production) and GDP in Q4. We're also fairly hopeful that this nascent revival in electronics that we're seeing in North Asia could also rub off on Singapore."

Still, the government said growth for the rest of the year could be weighed down by subdued global economic conditions.

Externally-oriented sectors such as manufacturing and wholesale trade will be affected by the slowdown in advanced economies, said MTI.

However, it said there will be modest support to growth from healthy expansion in the transport engineering cluster and construction sector.

Separately, Singapore's central bank unexpectedly maintained its monetary policy in its half-yearly review on Friday, due to inflation worries.

Potential increases in global food prices and a tight domestic labour market, which is likely to translate to higher wages and consumer prices, contributed to the Monetary Authority of Singapore's (MAS) decision.

The central bank said headline CPI inflation is likely to come in slightly above the forecast of 4.5 per cent this year, mainly because of higher COE prices.

By maintaining its policy, MAS will continue to guide the Singapore dollar to appreciate at its current rate.

It said there will be no change to the slope and width of its policy band for a modest and gradual appreciation of the Singapore dollar.

Most economists had forecast that the MAS may relax its monetary policy due to declining inflation.

But MAS said inflation rates will remain elevated in the fourth quarter this year and the first quarter of 2013, due mainly to higher contributions from accommodation and COE prices.

According to the MAS, core inflation is expected to average around 2.5 per cent in 2012 and 2 to 3 per cent next year. Headline inflation is likely to come in slightly above 4.5 per cent in 2012 and ease gradually to 3.5 per cent to 4.5 per cent in 2013.

MAS, which uses the exchange rate as a tool to control inflation, said its policy will help contain "inflationary pressures", and keep the economy on a path of restructuring towards sustainable growth.

Irvin Seah, senior economist at DBS Bank, said: "Quite a fair bit of the inflationary pressure is coming from the domestic economy. The understanding is that having a tighter exchange rate policy would actually cool economic activities domestically, and that would have an indirect impact on domestic inflation."