HSBC says morale should remain up even as Singapore economy is down

Although Singapore’s Q3 GDP growth slowed to 10.6% y-o-y and contracted by 18.7% q-o-q SAAR, the bank says the plunge was expected and should not be a cause for concern.

In a statement, HSBC said the figure was slightly better than Q3 flash estimates released last month, which read 10.3% y-o-y and –19.8% q-o-q SAAR.

The numbers, however, were a far cry from the 19.5% GDP growth posted in Q2 and the 27.3% expansion posted in the same period.

The slowdown was primarily driven by the manufacturing sector due to weaker external environment and scheduled production slowdown in the pharmaceutical sector. Trade-related services also slowed down and construction activity declined due completion of major projects.

Growth momentum, however, is expected to improve in Q4 while MAS is expected to keep its tightening bias in place with inflation trending up.

The manufacturing sector grew by 14.3% y-o-y (vs 46.1% in Q2), but dropped sharply on a sequential basis by 53.6% q-o-q SAAR (vs. a jumo of 66% in Q2). The sequential drop was driven by the weaker external demand conditions during the quarter in the context of heightened concern about the global economic outlook.

The construction sector posted growth of 7.1% y-o-y (vs. 11.5% in Q2), but contracted by 10.4% q-o-q SAAR (vs. a 29.2% gain in Q2) as major projects such as industrial and commercial buildings were completed in Q2.The service sector posted an annual growth of 10.1%y-o-y (vs. 11.7% in Q2) and sequential growth of 1.4% q-o-q SAAR (vs. 12.6% in Q2).

"The sequential slowdown was expected and should not be a cause for concern. Singapore's recovery since the height of the global financial crisis has been spectacular, with average q-o-q annualized growth of 36% during 1H10 and 18% during Q1-Q3," the bank said.

According to HSBC, the sequential slowdown in Q3 reflected the high base, the summer-lull in global external demand, and the business-as-usual volatility associated with the pharmaceutical sector .

"Looking ahead, we expect that growth will turn positive on a sequential basis in Q4 as pharmaceutical production comes back on-stream and as the manufacturing sector and trade-related services are supported by slightly improved external environments since this summer. This week's positive reading for non-oil domestic exports certainly suggests as much.

Moreover, labor market conditions are favorable and tourism is still going strong, which should support the retial, hotel and restaurant businesses," HSBC said.

For the entire 2010, HSBC is expecting annual growth to reach 13%, but said the figure could be higher. For next year, however, the bank s forecasting a "more sustainable" 4%, which it said reflects the base effect and the expected slowdown in growth among trading partners partly due to the maturation of the global inventory cycle.