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Singapore warns of slower growth after manufacturing-led boom

Strong performance, labor market recovery could result in adjustment to monetary policy

Singapore’s GDP grew 3.6% in the fourth quarter from a year ago, higher than the advance estimate of 3.1% released in January.   © Getty Images

SINGAPORE (Nikkei Markets) -- After a robust showing last year, Singapore's economy is headed for more modest, albeit better-balanced, growth.

The Ministry of Trade and Industry sounded a note of caution while releasing growth figures for last year that bettered the initial estimate, pointing to the likelihood of a slower pace of growth in key overseas markets.

"MTI's assessment remains that the external demand outlook for Singapore is expected to be slightly weaker in 2018 as compared to 2017," Loh Khum Yean, the ministry's permanent secretary, said at a media briefing.

Earlier Wednesday, MTI revised last year's gross domestic product expansion to a three-year high of 3.6% from an earlier estimate of 3.5%, helped by a strong performance in services during the fourth quarter. However, the growth in manufacturing was adjusted downwards to reflect an unexpected contraction in December.

While the International Monetary Fund has upgraded its global growth forecast for 2018 to incorporate the boost in the U.S. from tax reforms, economies that account for a large part of final demand for Singapore's goods and services are likely to moderate, Loh added. These countries include members of the Eurozone, Japan, China and Southeast Asia.

MTI expects the domestic economy to grow between 1.5% and 3.5% in 2018.

Irvin Seah, a senior economist at DBS Bank, said that despite the slower growth outlook for Singapore, economic activity has become more balanced with services likely to take over from manufacturing as the main driver.

According to Wednesday's data, Singapore's GDP grew 3.6% in the fourth quarter from a year ago, higher than the advance estimate of 3.1% released in January.

The manufacturing sector expanded by 4.8% on year, slowing from 19.1% in the third quarter. The ministry had pegged manufacturing growth at 6.2% on year in its advance estimate, which was published before the Singapore Economic Development Board announced a surprise drop in December manufacturing output.

The construction sector contracted by 5.0% on year during the fourth quarter following a 9.3% decline in the preceding quarter, while services maintained the same on-year growth pace of 3.5%. MTI had earlier said construction declined 8.5% on year during the fourth quarter while services grew by 3.0%.

MTI typically releases advance GDP figures a few days after the end of each quarter, and follows up with detailed economic data a month later when more information is available.

Looking ahead, the ministry said electronics manufacturing and precision engineering would continue to expand, although at a more moderate pace, helped by robust global demand for semiconductors and semiconductor equipment.

Externally-oriented services sectors such as finance and insurance, transportation and storage, and wholesale trade are also expected to benefit from firm external demand although the pace of growth could ease.

As for domestically-oriented services, sectors such as retail and food services are likely to perform better due to improved consumer sentiment and a recovery in the labor market.

Construction is likely to remain lackluster in 2018, while the outlook for the city-state's large marine and offshore engineering industry remains challenging due to weak demand conditions faced by local yards and producers of oil and gas field equipment.

DBS Bank's Seah added that the worst could be over for the construction sector due to the improved sentiment in the residential property sector.

Given the strong growth and a bottoming of the labor market, Seah forecasts the Monetary Authority of Singapore is likely to tighten monetary policy in April by allowing the local dollar to appreciate at a modest pace, reversing two years of zero appreciation.

"Overall, a stronger domestic growth outlook, coupled with a possible goods and services tax hike, may accelerate inflationary expectations and warrant the MAS potentially tweaking its monetary policy settings from its currently neutral stance," said Selena Ling, head of treasury research and strategy at Oversea-Chinese Banking Corp.

The Singapore budget, due February 19, is widely expected to include a tax hike to lift government revenues.

--Kevin Lim

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