Asia Economy

Analysts slash forecasts for Singapore 2014 growth

Orchard Road, Singapore
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A string of major banks and analysts in Singapore have downgraded their forecast for full year growth this year, as weakness in the manufacturing and services sector continues to takes its toll.

DBS bank on Wednesday cut its forecast to 3 percent from 4 percent, while OCBC bank recently downgraded its projection to 3.3 from 3.5 percent and CIMB Research has cut its forecast to between 2.5 and 3 percent from 4.3 percent at the start of the year.

The DBS analysts said they made the decision to downgrade the full year growth after the flash numbers for second quarter growth came in much weaker than expected, contracting for the first time in seven quarters.

In the second quarter, Singapore's economy contracted 0.8 percent from the previous quarter and expanded 2.1 percent year-on-year, a slower rate than the 4.7 percent year-on-year growth rate seen in the first quarter, advance estimates from the Ministry of Trade and Industry (MTI) showed in mid-July.

"The slowdown was broad-based, with all key sectors posting slower growth. Based on this and the current outlook, we have downgraded our full year growth forecast," said the DBS analysts in a note published on Wednesday.

Read MoreSingapore economy contracts in second quarter

DBS flagged the manufacturing sector as a particular sore spot. In the second quarter, growth in the sector saw a dramatic slide to 0.2 percent year-on-year, from nearly 10 percent year-on-year in the previous quarter.

The analysts said one-off factors in the first quarter – mainly the surge in pharmaceutical output and a spike-up in offshore marine engineering pro­duction – had pushed up the first quarter number artificially leading to the steep drop in the second quarter.

But Singapore's services sector, traditionally the most stable engine of growth, poses the largest risk to the economy, DBS said.

"Growth here slowed to 2.8 percent year on year in the second quarter of 2014, from 3.9 percent previously. And this is down from 5.5 percent and 5.8 percent, in the fourth quarter and third quarter of 2013 respectively. This downward trend warrants close attention," said the DBS analysts .

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Singapore manufacturing to remain soft: Pro
Singapore manufacturing to remain soft: Pro

DBS pointed out that because services account for around 70 percent of gross domestic product, its continued decline poses a significant threat to the economy's medium term prospects. They also blamed the existing labor crunch, due to curbs in foreign manpower, for causing declines in this labor intensive sector.

"The economy continues to be weighed down by the domestic restructuring and external uncertainties," added Seah.

Meanwhile, Song Seng Wun, an economist at CIMB Research, also told CNBC declines in the manufacturing and services sector were predominantly to blame for the generally lower expectations for Singapore growth this year.

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"In terms of manufacturing growth, we were looking for 5 percent growth for the year – which now doesn't look like it's going to materialize, given the drag that is still coming through from tech manufacturing," he said.

Manufacturing contributes around 28 percent to Singapore's economy.

Song added that the services sector has also faced a number of headwinds this year, including the measures to curb the property market and slower visitor arrivals as a result of the turmoil in Thailand and the MH370 crash, which has dampened Chinese travel sentiment.

"We also note that global growth has been lower than expected as well and Singapore is very exposed to global demand," he added.