Better growth for the second quarter is likely, but there are bumps ahead

SINGAPORE - Tomorrow's report card on the economy is likely to show an improvement from the near flat growth seen in the first quarter but experts advise keeping the champagne on ice.

Businesses and analysts warned that times will be harder over the rest of the year with plenty of headwinds in prospect.

That would signal a sharp change from the first six months.

Economists tipped that the Trade and Industry Ministry report would likely show that the economy grew by at least 2 per cent in the three months to June 30, compared with the same period last year.

This will easily surpass the feeble 0.2 per cent pace in the first three months of the year.

Credit Suisse economist Michael Wan reckoned busier factories and robust stock market activity should boost growth to 2.6 per cent over the same period last year.

But whether this momentum could carry through to the rest of the year depended on how the global economy recovered in the second half, said ANZ economist Daniel Wilson.

He noted that local manufacturers have become more optimistic and have built up an inventory of goods in anticipation of a recovery in the United States.

"However, if this fails to eventuate, the rebound in industrial production will likely be shortlived and manufacturers will be dealing with an inventory overhang," added Mr Wilson.

Even if the local economy has picked up steam, growth is clearly not well distributed. For still buoyant sectors like construction, it is business as usual, helped by a steady stream of public infrastructure projects and private residential developments.

KSH Holdings, for example, has an order book that stretches over the next five years.

"As long as there is a demand for homes, the construction sector will be steady," said managing director Choo Chee Oon.

But manufacturing continues to experience slowing demand while having to deal with rising costs from higher wage demands.

Bank of America Merrill Lynch economist Chua Hak Bin said the manufacturing recovery has largely been the result of a strong pharmaceutical production so far.

"Smaller companies, especially those in the electronics business, will get hit both by tighter foreign worker curbs and slack demand."

Take PTS Technologies. Its boss Albert Loh said the past year had been extremely challenging for his firm, which produces radio frequency identification tags.

"Our business dipped by 30 per cent in the first half of this year. We managed to stay afloat but barely - water was at one point in our noses and ears," he said.

"Costs are soaring and manpower difficult to get. So we decided to finally move all our manufacturing operations to Batam early this year."

He had to lay off some workers to trim costs. Fortunately, his firm is now winning more orders from Europe, especially since he started to develop new products with a British partner. "It's at least something," said Mr Loh.

The one thing that most analysts are sure about is that unemployment will stay low, given the tight labour market.

Unemployment stood at 1.9 per cent in March, with job vacancies rising 17 per cent in the same period. Mr Joshua Yim, chief executive of recruitment firm Achieve, said a recent survey by his firm of 500 employers found the outlook remained bright in the job market.

Around 48 per cent were looking to hire over the next six months.

"Firms are still looking to add to their workforce. I don't know about a slow economy, but from my end, it's clear that confidence is rising," he added.

One explanation for the divergence between slow growth and high employment levels could be because many firms are still hoarding manpower, said Credit Suisse's Mr Wan.

"Firms are probably still hoarding workers because they know that workers will be harder to get, once more manpower curbs come on stream in the next two years," he said.

"But it's unsustainable and at some point firms will have to let go."

Retail, services sectors see dip in spending

For the past two years, domestic demand has been one of the key pillars of support for the broader economy, adding more to growth than exports did.

But doubts are rising over whether this engine of growth can continue to prop up the economy this year.

For the first three months of the year, private consumption rose 1.6 per cent, compared to a decline of 4.2 per cent for exports.

But retailers and service providers told The Straits Times that things have not been looking that positive during the past few months.

People are not spending as much as before, said Mr R. Dhinakaran, managing director of the Jay Gee Group.

"For January to May, year-on-year, our topline saw a double-digit dip. Our sales are going down but overhead expenditures and rentals are going up," he said.

"I don't see any bright lights for now. The doom and gloom will continue until the global economy recovers."

Hotels are holding up but the slowing economy is putting pressure on them, said Mr Franz Zeller, senior vice-president for Asia at Millennium & Copthorne International.

"In Singapore, subdued trading reflects a slowing economy, continued restraint in corporate travel budgets as well as an increased supply in available hotel rooms," he said.

"This has put pressure on operating costs in the hospitality sector."

In the financial services sector, which soared 50.6 per cent in the first quarter over the previous three months, the outlook is murky given the potential for a sharp market correction.

Said OCBC economist Selena Ling: "Although it is unlikely that the financial services sector could have maintained its 50 per cent clip into the second quarter, we expect it will remain an important driver for the services sector if global risk appetite and market sentiments continue to sustain in line with the global economic recovery."

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