Silver lining in GDP results: They’re a little less disappointing

Final numbers for the fourth quarter showed a smaller than previously estimated contraction.

Leif Eskesen, Chief Economist for India and ASEAN at HSBC, noted:

Facts
According to final estimates, Q4 GDP grew an unrevised 3.6% y-o-y (vs. a slightly upwardly revised 6.0% in Q3 2011). Final numbers, however, showed a smaller than previously estimated contraction of 2.5% q-o-q SAAR (vs. upwardly revised 2.0% expansion in Q3 and the advance estimate of -4.9%). This was below consensus of 4.3% y-o-y, but matched our 3.6% y-o-y call.

For 2011 as a whole growth came in at 4.9% y-o-y (vs. an upwardly revised 14.8% in 2010), matching our full-year forecast. Looking at revisions during the year, sequential q-o-q SAAR growth rates were revised down for Q1 and up for Q2-Q4.

Looking at the supply side, the moderation of growth in Q4 was largely due to the slowdown in the manufacturing sector, although the numbers were revised up relative to the advance estimate. On an annual basis, manufacturing slowed to 9.2% y-o-y (vs. 13.7% in Q3 and the advance estimate of 6.5%) and on a sequential q-o-q SAAR basis, manufacturing contracted by 11.1% (vs. +11% in Q3 and the advance estimate of -21.7%). The weakness in manufacturing was primarily driven by the electronics sector and a pull back in the pharmaceutical sector.

The construction sector, on the other hand, saw annual growth rise to 2.9% y-o-y (vs. 2.4% in Q3 and the advance estimate of 1.7%) and a smaller sequential contraction (-2.2% q-o-q SAAR vs.
-4.0% in Q3 and the advance estimate of -6.7%). The quarter contraction was still driven by weaker private residential and commercial building activities.

Service sector activity was more modest and weaker than originally estimated. Overall, service output grew just 2.1% y-o-y (vs. 3.6% in Q3 and the advance estimate of 3.2%). However, activity still improved on a sequential basis, up 1.7% q-o-q SAAR (vs. a 0.8% contraction in Q3 and the advance estimate of +3.4%). Service sector activity was sequentially mostly pulled down by trade-related services such as ‘transport & storage’ and sentiment sensitive financial services such fund management and brokerage.

Turning to the demand side, the slowdown was broad-based. Private consumption slowed notably (1.9% y-o-y vs. 5.9% in Q3) and public consumption contracted (-5.8% y-o-y vs. 1.3% in Q3) in annual terms, although this in both cases partly reflects base effects. Fixed investments, both public and private, also slowed significantly (-0.2% y-o-y vs. 8.0% in Q3. The only components pulling in the other direction were changes in inventories and net exports, the latter holding up despite weaker exports due to drop in imports.

Implications
Singapore's vulnerability to spill overs through the trade and finance channel was confirmed by these numbers, with the export-driven manufacturing segment, trade related services and sentiment sensitive financial services pulling down growth.

The manufacturing sector, and the electronics cluster in particular, have been hit hard by the weakness in final demand from the US and Europe. The same goes for the trade and more sentiment sensitive segments of the service sector. This is likely to persist. Moreover, slower growth in China and the rest of Asia will also dampen external demand in 2012.

Domestic demand, mostly private consumption, will help cushion the slowdown, with consumer spending supported by still favorable labor market conditions. However, consumer sentiments are likely to be dampened by the persistence of global economic uncertainty and the significant slowdown in private consumption growth in Q4 is testament to the precarious nature of confidence.

These factors will keep growth weak during the first half of 2012. A moderate recovery is projected during the second half in line with an expected gradual improvement in the global trade cycle. This will, in our view, take full-year growth to 2% in 2012, well below its long term potential. However, the risks to the outlook are currently mostly tilted to the downside, with an escalation of the sovereign debt crisis in Europe clearly the dominant risk.

In spite of the projected slowdown, the MAS is likely to maintain its tightening bias for now given the elevated level of inflation. But, it will take full advantage of the flexibility afforded within the NEER band to accommodate global weakness.

However, in the event the sovereign debt crisis in Europe escalates further and/or prolongs, the MAS may need to recalibrate monetary policy settings by twisting and shifting the band. Also, let’s see what goodies the Minister for Finance has in the bag when he presents the budget tomorrow.

Bottom line: Q4 GDP numbers were weak, although less than the advance estimate suggested. However, growth is set to slow further in 2012 as the global economy cools. Private domestic consumption will provide some cushion, but not enough to prevent growth from sinking well below its potential.