Singapore economy contracts in second quarter

Singapore's economy contracted unexpectedly in the second quarter, hurt by a slide in manufacturing activity, official data showed on Monday.

On a quarter-on-quarter basis, the wealthy city state shrank 0.8 percent, compared with the 2.5 percent rise Reuters forecast and following the 2.3 percent gain in the first quarter.

Growth on an annual basis also missed targets - up 2.1 percent versus a Reuters forecast of 3.1 percent increase and after logging a 4.9 percent annual rise in the first quarter.

The last time Singapore logged a quarterly contraction was in the third quarter of 2012, when GDP shrank 3.6 percent.

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Breakdowns by sector showed that manufacturing fell 19.4 percent on quarter, down sharply from 12.2 percent growth in the first quarter. The construction sector grew by 2.6 percent in the second quarter, while the services sector expanded by 5.2 percent.

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"What we've seen across the region is there's been some recovery in the PMIs (purchasing managers' index) but that's more aligned to what's happening in the consumer electronics sector. Singapore has more of a leverage to the business electronics sector. Until we see a durable upswing in the capital expenditures, it's probably not likely we'll see Singapore's electronics manufacturing production outperform," said Glenn Maguire, chief economist, Asia Pacific at ANZ.

Others caution against reading much into quarter on quarter movements in Singapore's economy, as the data tend to be "volatile."

"The manufacturing sector, in particular, is prone to sudden lurches. What's more, advanced GDP estimates aren't always a good guide to the final numbers," said Daniel Martin, Asia economist with Capital Economics, who has a 3.5 percent full-year growth target for the economy.

Even as Singapore continues to restructures its economy to put more emphasis on productivity over manufacturing, economists are cautiously optimistic that growth should look better in the second half.

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"Our guarded optimism stems from that U.S. recovery panning out fairly steadily and euro zone downside risks are being kept in check with policy accommodation. Japan is also on course with 'Abenomics' gaining traction. Crucially, China's measured stimulus appears to be providing some cushion too," Vishnu Marathan, senior economist with Mizuho Bank, wrote in a note.

Services biggest risk?

DBS, who has a 4 percent annual growth target for Singapore, says the economy is at risk of further slowdown with the services sector taking a hit from a labor crunch.

"While the outlook of the manufacturing sector is expected to run sideways, the sub-par performance in the services sector is perhaps the biggest risk (to the Singapore economy)," said DBS Senior Economist Irvin Seah in a recent note.

Labor has remained tight in the South Asian nation in part because of hiring curbs on foreigners put in place in recent years to quell discontent among locals who blame migrant workers for increased competition in jobs.

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"The existing labor crunch due to the curbs in foreign manpower has been taking the toll out of the (services) sector. Risk is that this sector may continue to decelerate in the coming quarters, which will post a threat to the medium term prospects of the economy given its relatively large contributions to GDP and employment," Seah noted.

Services makes up 68 percent of Singapore's GDP and about 70 percent of total employment, according to DBS estimates.

In light of Singapore's structural slowdown, economists do not expect the latest GDP read to have much sway on monetary policy.

"Given our view that Singapore is undergoing a structural slowdown, we see little scope for the MAS [Monetary Authority of Singapore] to loosen policy without risking a rise in inflation. The central bank appears to share this view, and has repeatedly stressed the danger that the tight labor market poses to the medium term inflation outlook," said Capital Economics' Martin.

"We expect it keep its policy stance unchanged at its bi-annual meeting in October," he added.