Here's why fears of dull growth escalate in Singapore

2012 GDP growth forecast dips to 2.5%.

According to DBS, their full year GDP growth forecast for 2012 has been lowered to 2.5%, from 3.0% previously. And against the rising global uncertainties and fading external demand, downside risk to headline GDP growth will most likely continue to escalate. "With this in mind, we have also shaved the GDP forecast for 2013 to 3.7%, down from 4.3%," they said.

Here's more from DBS:

Plainly, Singapore is after all an externally driven economy. While GDP growth for neighbouring countries such as Malaysia and Indonesia are holding up better than expected on account of their domestic demand, Singapore’s growth momentum is fading fast. The recent non-oil domestic exports (NODX) and industrial production numbers have provided some strong evidence of what lies ahead. And it’s not a pretty picture.

One may argue that the headline NODX grew by 5.8% YoY in July after a 6.6% expansion in May. But it’s the change at the margin that matters, not the year-on-year figures. On that basis, NODX fell by 3.6% MoM sa in July. Separately, the industrial production figures have been slipping. Overall industrial production index dipped 9.1% MoM sa, led by a 28.5% plunge in pharmaceutical output. In addition, ex-biomedical production has been declining for two consecutive months, at an average pace of 3.8% MoM sa in June and July.

The declines have also been consistent with the trend in other indicators. Singapore’s very own PMI as well as the PMIs of key markets have been sliding further southward into the contraction territory (<50) (see chart). The SEMI book-to-bill ratio, an indicator on the health of the electronics industry has dipped to below parity level, signaling a contraction in the industry. In short, the manufacturing sector is in for a rough patch. Not only will it affect the headline GDP figure, there will be spillover effects on the other segments of the economy, specifically the services sector.

The services sector has contracted by 0.6% QoQ saar in the second quarter, down from an expansion of 2.9% in 1Q12. Except for the transportation, inforcomm and the financial services industries, all segments within the services sector have shrunk
in 2Q12. Judging from the current external economic conditions, such sluggish growth momentum will likely persist in the coming quarters.

In addition, the tightening measures on foreign labour probably have also suppressed growth momentum in some of those foreign labour-intensive industries. This is likely to be reflected in the continued poor performance by the construction sector. Developers may also be slowing down the pace of construction amid a gradual cooling down in the property market.

Going forward, the global economy is seen heading into choppy waters, which will have significant impact on the growth prospects for the Singapore economy. Growth momentum is likely to be significantly slower than previously anticipated and that mainly explains the revision to the forecasts. Separately, inflation has eased to 4.0% YoY in July on account of base effect.

It should stay sideways for the coming months and average 4.5% for the entire year. Though inflationary pressure remains higher than usual, the balance of risk has undeniably tilted towards growth rather than inflation. Our downgrade in the growth outlook has further strengthened our view that monetary policy has to shift to a more accommodative stance in the upcoming review in October.