- Economic growth is likely to be sustained into 2018 thanks to resilience from the service sector.
- Trade war impact would be felt in the manufacturing sector but fears are overblown.
- Growth in ASEAN region and trade agreements will help Singapore tide through the storm.
Analysts have been throwing estimates of the impact from the tariffs threats on China by the US as many expect Singapore to take a hit if China and US impose tariffs on each other due to its open-natured economy. However, we believe most analysts are too bearish and Singapore’s economy have performed adequately over the first half of 2018 and should continue to hold up over the second half.
The Ministry of Trade and Industry (MTI) just released the Gross Domestic Product (GDP) numbers for the second quarter of 2018 with year-on-year growth coming in at 3.9%, falling short of the consensus forecast of 4.1%. MTI still maintains the view of 2.5% to 3.5% growth for the year of 2018.
Chart 1: Singapore’s Real GDP Growth (%)
In the sector breakdown of GDP growth, the manufacturing sector leads the charge with 10.2% year-on-year growth in the second quarter, following first quarter’s growth of 10.8%. However, the construction sector remains a serious laggard, having faced contraction since 2016 fourth quarter.
Chart 2: Growth of Individual Sectors
Following the trade wars and rounds of punches thrown by the US and China, the manufacturing sector may take a hit via the electronics sector. The demand for electronics is likely to fall due to US tariffs on numerous Chinese goods including electronics and electrical equipment.
However, in a survey conducted by Singapore Economic Development Board (EDB) on business sentiments, a net weighted balance of 7% of manufacturers expects a positive business situation for the second half of 2018. Singapore’s Manufacturing Purchasing Managers’ Index (PMI) by Singapore Institute of Purchasing and Materials Management (SIPMM) reflects an expansion in the manufacturing sector too although the reading decreased from 52.5 to 52.3 in July, which could be attributed to the foreseen drop in demand due to trade tensions.
Chart 3: Singapore Manufacturing PMI
Looking at the components of GDP, the services sector account for about 70%. Growth in services sector has been low and stable and we expect it to pick up in the second half of 2018.
Chart 4: Components of GDP in 2017 based on 2010 Prices
In a survey conducted by Department of Statistics (Singstat), outlook for the services sector remains bright for the second half of 2018 with a net weighted balance of 9% of firms expecting better business conditions. The second half of 2018 brings along the Formula One night race in September and the holiday season. The accommodation sector stands to benefit the most with these firms being the most optimistic in the services sector. Financial institutions like banks and insurance companies also foresee better business in the second half. As such, these sectors are likely to drive growth in the next half of 2018.
Furthermore, the ASEAN region is still doing well with Malaysia and Indonesia expecting 5% and 5.3% GDP growth in 2019 respectively. Local consumer sentiment is also high in both Malaysia and Indonesia with Malaysia’s level at a 21-year high of 132.9 points and Indonesia’s being 128.1. We expect growth to spill over to the ASEAN region through higher tourism activities and trade. The benefactors of that would be the manufacturing and services sectors.
Chart 5: Composition of Singapore’s Exports by Region in Jun 2018
Looking at exports by region, trade to our ASEAN partners comprises of the bulk of our total exports at 30%, followed by Hong Kong and China at about 12% each. We believe fears from the ongoing trade war between US and China are overblown. Some impact could be expected, mainly through lower demand for electronics and trickle-down effects from the global supply chain. The more important trade channel would be the ASEAN region where there are two major trade agreements in the works.
The Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) are in the works with every member of ASEAN being a beneficiary of the former, while Singapore, Malaysia and Vietnam are three of the eleven countries part of the CPTPP. The RCEP is expected to be signed in November 2018 after being introduced in 2011. RCEP could potentially be the world’s largest trading bloc with a total GDP of USD 49.5 trillion. Meanwhile, the CPTPP encompasses a combined market of 500 million people with a GDP of USD 10 trillion and it awaits ratifications from three more participating countries for it to take effect. The effects from the two trade agreements cannot be underestimated and would be a huge boost to trading activity for Singapore and her fellow ASEAN members.
Taking all these factors into account, Singapore’s economy should hold up for the second half of 2018 due to resilience from the services sector. We forecast 2018’s growth to be in the range of 3.5% to 3.8% and next year’s GDP growth to be around 3.0% due to growth from the ASEAN region.
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