SINGAPORE (Nikkei Markets) -- The Singapore economy exceeded estimates of second-quarter growth as the services sector gathered momentum, supporting the trade-driven recovery.
The Ministry of Trade and Industry, which released the quarterly data on Friday, narrowed its full-year growth forecast to 2%-3% from its earlier range of 1%-3%, saying it took into account the global and domestic economic environment.
Although MTI warned of familiar downside risks such as the likelihood of growing protectionism, which could hurt trade, it said the potential for these to have a significant impact on global growth this year has eased compared to three months ago.
"Barring unexpected outcomes in the global economy and key sectors in the domestic economy for the rest of the year, MTI's central view is that GDP growth for the full year is likely to come in at around 2.5%," the statement said.
In the second quarter ended June, gross domestic product grew 2.9% year-on-year, MTI said. This is above the government's earlier estimate of 2.5% as well as the growth rate of the first-quarter, which was also 2.5%.
On a quarter-on-quarter seasonally adjusted annualized basis, the economy expanded 2.2%, a reversal from the contraction of 2.1% in the preceding quarter.
The upward revision to the second-quarter growth rate was expected after the robust production rates recorded by Singapore's factories in June, which were not captured in the flash estimates based primarily on data for the first two months of the quarter.
Manufacturing, which accounts for about 20% of GDP and around 14% of employment in the city-state, has been the star performer as the trade-dependent economy began to revive in the last quarter of 2016. In particular, electronics and precision engineering companies have benefited from increased demand for semiconductor manufacturing equipment.
In a separate statement Friday, International Enterprise Singapore said non-oil domestic exports, a closely watched indicator, rose 2.7% on-year in the second quarter, slowing from the first quarter's 15.3% pace. Shipments of electronics products rose 13.3% offsetting a 1.1% decrease in non-electronic exports, IE Singapore said. At the same time, the agency narrowed its forecast for non-oil domestic exports this year to 5%-6% from 4%-6% earlier. The more positive view was due to upgraded growth forecasts for its major trading partners.
According to MTI's data, manufacturing grew 8.1% year-on-year in the second quarter, just a touch above the government's earlier estimate of 8%, and below the 8.5% growth in the previous quarter. On a quarter-on-quarter seasonally adjusted annualized basis, the sector expanded 2.9%, accelerating from the 0.3% growth in the previous quarter.
Meanwhile, services, which accounts for some two-thirds of the domestic economy, grew 2.4% on-year as against the earlier estimate of 1.7% and faster than the first-quarter's pace of 1.4%.
"This is the strongest services growth in almost two years," Maybank Kim Eng's Chua Hak Bin and Lee Ju Ye wrote in a report. "Growth is broadening from manufacturing to services...The domestic economy is starting to benefit and strengthen from the trade-led growth recovery," they said.
Growth in wholesale and retail trade, finance and insurance, transport and storage, and business services all accelerated on-year in the second quarter although accommodation and food services continued to struggle, hurt by sluggish sales at restaurants.
Looking ahead, MTI said the manufacturing sector is likely to continue to support the economy in the second half of the year. In particular, MTI expects the strong performance of the electronics and precision engineering clusters to be sustained although the pace of expansion may moderate given less favorable base effects.
MTI was also optimistic about externally oriented services sectors such as transportation and storage, wholesale trade and finance and insurance sectors. However, it expects construction to remain lackluster. The sector contracted 5.7% on-year in the second quarter, against the 5.6% flash estimate and following on the 6.3% decline in the previous quarter. Both private sector and public sector construction activity fell.
Oversea-Chinese Banking Corp, which is retaining its full-year growth forecast at 2.5%, expects the pick-up in services to be partially offset by a moderation in the manufacturing momentum.
While global growth prospects are gaining momentum, "there is still considerable uncertainty about the inflation story given that crude oil prices remain subdued and domestic labor market conditions are not red-hot," said Selena Ling, OCBC's head of treasury research and strategy.
MTI, in identifying downside risks other than growing anti-globalization sentiment, said U.S. monetary policy could normalize faster than expected. The ministry also referred to policy uncertainty in the U.S. and added that there could be a steeper-than-intended pullback of credit in China as efforts to contain leverage and risks in the financial system continue.