Singapore to see better quality of growth

Growth in 2Q17 saw all three key sectors emerging above water in unison. It has been a long while since Singapore has seen such synchronised improvement.

Key summary points

  • GDP growth in 2Q17 saw a broad-based improvement in growth momentum across all key sectors
  • The turnaround in services should make recovery more sustainable and augurs well for the job market
  • Recovery is gaining strength. Second quarter GDP growth isn’t the top

Singapore’s GDP growth for 2Q17 registered 2.9% year-on-year, in line with expectation and higher than in the previous quarter. Besides faster growth, the most encouraging sign is that the quality of growth is improving.

What caught most people’s attention in the latest set of GDP figures is the improvement in the headline numbers. The economy expanded by 2.9% y-o-y, higher than the advance estimate, as well as the previous quarter’s 2.5%. Moreover, the economy also recovered from a sequential decline of 2.1% quarter-on-quarter seasonally adjusted annualised rate, to post an expansion of 2.2%.

More significant, however, is that growth is becoming more broad-based. The q-o-q, saar growth figures best illustrate this. Unlike the surge in 4Q16, which was mainly driven by the manufacturing sector, growth in 2Q17 saw all three key sectors emerging above water in unison. It has been a long while since Singapore has seen such synchronised improvement.

Importantly, the services sector, which accounts for two-thirds of the economy, turned the corner. Services expanded 2.4% y-o-y and 3.3% q-o-q, saar. Except for accommodation and food services, all key services segments are back in expansion mode. Note that services is the largest sector in the economy and, traditionally, has always been a stable engine of growth. The turnaround in the services sector will make the recovery more sustainable.

In addition, the improvement in the services sector bodes well for the labour market. As of 1Q17, the services sector accounts for 72.8% of total employment. Historically, the job-vacancy-to-unemployed-person ratio, a proxy for labour market conditions, tend to lag the services growth cycle by about two quarters. Hence, a sustained growth in the services sector points to improved job prospects.

That said, the labour market still faces structural / transitional constraints. Some jobs are disappearing as old industries fade. It will take time for workers to move into new industries. Automation and disruptive technologies could also reduce labour demand. And the new growth industries such as fintech, creative IT solutions, aerospace, robotics and advanced manufacturing, are less labour-intensive than older manufacturing industries. Nevertheless, an improvement in growth momentum, particularly in the services cluster, should help to lift the tide in the labour market over time.

GDP growth hasn’t peaked. Output in 3Q16 was low, which means on-year growth is likely to be stronger still next quarter. Even assuming zero sequential growth in 3Q17, on-year growth will be about 3%.

The picture from a q-o-q saar perspective is less obvious. While the economy grew a credible 2.2% compared to the previous quarter, this is slow by Singapore’s standards. Furthermore, the economy has a tendency to end every year with a bang. Average fourth-quarter growth on a q-o-q saar basis has been a solid 8.4% over the past five years. So if the economy “sticks to tradition”, then 2Q17 GDP growth on a q-o-q saar basis can’t possibly be the peak as well.

The recovery is gaining strength. GDP growth remains on track to meet our forecast of 2.8% for 2017. More importantly, it is the quality of growth that matters and in this regard, things are looking up.

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