07/23/2015
Singapore / Economics
Singapore's severe labour crunch has taken its toll on the manufacturing and services sectors, with the risk of a prolonged services slowdown bringing down the GDP forecast for the year.
Singapore’s weak GDP growth in the June quarter surprised many. Based on initial estimates, the economy contracted by 0.8% on-quarter, translating into a year-on-year expansion of 2.1%. The slowdown was broad-based with all key sectors posting slower growth, but tepid performance in the manufacturing sector and a persistent deceleration in services were the key reasons. Based on this and the current outlook, we have downgraded our full year growth forecast to 3.0% from 4.0% previously.
The manufacturing sector, the key driver of growth in the March quarter, became the weakest link in the June quarter. Growth slipped to a mere 0.2% on-year, from 9.9% previously. The strong showing by the manufacturing sector in the March quarter was never sustainable in our opinion. The surge in pharmaceutical output and a spike in offshore marine engineering production were never meant to persist.
Moreover, the manufacturing sector is being weighed down by economic restructuring and weak export competitiveness. The labour crunch, due to curbs in foreign manpower, remains a problem with higher costs affecting exporters’ ability to compete.
The labour-intensive services sector, traditionally the most stable engine of growth, is becoming the biggest risk to the economy, on the back of the labour crunch. Growth here slowed to 2.8% on-year in the June quarter, from 3.9% previously. Down from 5.5% and 5.8% in the 2013 December and 2013 September quarters, respectively; this downward trend warrants close attention.
The risk of the services sector continuing to slow in the coming quarters poses a threat to the medium-term prospects for the economy given its relatively large share in GDP and employment. The sector accounted for about 70% of GDP and total employment share in 2013.
The external outlook remains a question. While expectation of a gradual recovery remains in place, recent data have been mixed. Demand from Asia and the West remains sluggish. Growth expectations for the US have been lowered. This is juxtaposed against a weak Eurozone and a slowdown in China. None of this bodes well for Singapore.
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