Stronger growth, but improvement uneven

The Singapore economy picked up speed in 2016's final months after an extended funk, and the momentum seems on track to continue this year.

However, the positive outlook appears limited to just the manufacturing sector and some associated services - and even then, only certain segments.

Lacklustre consumer and business sentiment is still weighing heavily on other sectors and the labour market remains weak.

Data released yesterday by the Trade and Industry Ministry (MTI) showed that the economy expanded 2 per cent last year.

This marginally better-than-expected showing was mainly driven by a year-end turnaround in manufacturing, which makes up a fifth of the economy.

Manufacturing output surged 11.5 per cent in the past three months of last year compared with a year earlier, accelerating from 1.8 per cent in the preceding quarter.

This robust showing was led by strong growth in the electronics and biomedical manufacturing clusters.

MTI Permanent Secretary Loh Khum Yean said the momentum is expected to continue this year, "supported by a continued recovery in the global demand for semiconductors and semiconductor equipment".

Still, he noted that not all manufacturers are doing well and "there will be some other segments that will face challenges (this year)".

These include the marine and offshore engineering cluster, which has been hit hard by plunging oil prices, and general manufacturing.

Prospects in other sectors are also not looking especially optimistic.

The outlook for the service sector, which makes up two-thirds of the economy, "remains cautious" amid heightened uncertainties, which could dampen growth in segments like finance and insurance, he said.

Also, despite stronger economic growth numbers, the labour market remains weak - 2016 saw the highest number of layoffs since the global financial crisis in 2009.

Yesterday's data prompted some economists, including Citi economist Kit Wei Zheng, to revise full-year growth forecasts upwards.

But Mr Kit, who now expects the economy to expand 2.5 per cent this year instead of 1.5 per cent, said the stronger growth number "masks a two-speed economy".

"While tech restocking should persist and other externally oriented services may improve, household debt servicing burdens, corporate sector consolidation and job market slack may remain a drag," he noted.

"Continued risk of bankruptcies in the offshore and marine cluster, (as well as) persistent weakness in retail, food and beverage, and construction continue to weigh on business sentiment.

"This does not yet factor in significant risks from trade protectionism, to which Singapore will be undoubtedly vulnerable, though the precise timing and nature of such measures are hard to predict."

DBS senior economist Irvin Seah said the rebound in the last three months of last year was "externally driven for sure", given that the semiconductor and biomedical manufacturing clusters are heavily export-dependent.

This spilled over into some supporting services like transportation and storage as well as financial services, "but at this point, as with all initial turnarounds, the improvement has been uneven".

This explains why sentiment on the ground remains cautious, said Mr Seah.

"It will take a while for the improvement to be felt by the rest of the economy and in the labour market. Most SMEs would not have felt the positive impact yet," he said.

"Employers would want more clarity about the economic outlook in the medium term before deciding to hire more workers."

This article was first published on Feb 18, 2017.
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