Risks remain but economists pin growth hopes on service sector

The economy may have pulled off a last-minute dash to record stronger growth in the final three months of last year, but economists warn that the outlook remains murky this year.

The economy posted a 2 per cent growth in the final three months of the year, compared to the same period a year ago, turning in growth of about 2.1 per cent for the full year, according to flash estimates from the Trade and Industry Ministry.

But a host of global risks remain, including slowing growth in China and uncertainties surrounding the United States Federal Reserve's next interest-rate hike, said OCBC economist Selena Ling.

At home, slower labour-force growth and lacklustre productivity are dragging down Singapore's long-term potential expansion rate, said Bank of America Merrill Lynch economist Chua Hak Bin.

"We think that services will continue to support growth this year. While manufacturing will remain in the doldrums, "services growth will likely be healthy enough to keep Singapore out of recession", he said.

Economists said services, which make up about two-thirds of the economy, will remain the key growth driver this year as well as in the longer term. The sector was the main source of an unexpected lift to growth in the last three months of 2015.

Expansion in the service and construction sectors helped make up for weak manufacturing in the fourth quarter.

The service sector grew 3.2 per cent over the same quarter a year ago, and expanded 3.6 per cent for the whole of 2015.

"Singapore's service sector has remained resilient amid one of the weakest years on record for the manufacturing sector," said JP Morgan economist Benjamin Shatil.

Overall, service output rose by about the same magnitude that manufacturing declined, he noted.

Financial services, wholesale and retail trade, and other business services turned in the strongest numbers.

Services' share of the economy has been rising over the years, even as manufacturing's contribution shrank, said Mr Shatil.

Public construction activity such as the Changi Airport expansion and various train lines also helped support growth in the fourth quarter, noted Credit Suisse economist Michael Wan.

The construction sector grew 2.2 per cent in the last three months of the year, and 1.1 per cent over the whole of last year.

Meanwhile, manufacturing was the worst performer.

Factory output plunged 6 per cent in the fourth quarter over the corresponding period a year earlier, weighed down by declines in the electronics, transport engineering and precision engineering clusters.

This was the sector's fifth consecutive quarter of year-on-year contraction. It shrank 4.8 per cent over the whole of last year.

Economists said the outlook for manufacturing remains dim, clouded by sluggish global sentiment, weak oil prices and tough domestic conditions.

Bank of America Merrill Lynch's Dr Chua said the sector "has borne the brunt of restructuring pains, with cutbacks on production and employment".

He noted that the manufacturing sector shed 15,600 workers in the first nine months of last year, compared with 4,400 for the whole of 2014.

DBS economist Irvin Seah said there is a risk that the weakness in manufacturing might spill over into other parts of the economy.

"While (the service sector) is known to be a resilient and stable engine of growth for Singapore, (its performance) will be affected by the existing domestic manpower crunch and drag from the manufacturing sector," he said.

This article was first published on Jan 5, 2016.
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