Singapore economy seen to expand by 8.5%

It translates to a 1.1% YoY growth, but down from 3.6% in 4Q11 - so is the economy really heading up or down?

According to DBS, advance GDP estimates for 1Q12 as well as the policy decision by the Monetary Authority of Singapore will be announced Friday morning. Though it may not be the most auspicious day, the final outcome is expected to bring some cheers to the market and will also put pressure on the official forecast to be raised.

Here's more from DBS:

Specifically, the economy is expected to expand by 8.5%( QoQ, saar), up from a contraction of 2.5% in the previous quarter. This translates to a 1.1% YoY growth, down from 3.6% in 4Q11. This is where most people will have problem trying to decipher whether the economy is heading up or down since sequential and yearly growth figures are pointing in opposite direction.

As we’ve pointed out many times in the past, it’s the sequential growth that matters and that truly reflects the current status as it is. Importantly, this is also significantly above previous market expectation at the beginning of the year and should bring about a series of upgrades in the full year GDP forecast. Our long-held above consensus forecast of 3.5% for the full year remains on track and we expect market to inch closer to our forecast in the coming months.

There are two key reasons behind the rebound. Firstly, the manufacturing sector is making a strong turnaround. The spike-up in production output in Dec11 has been sustained into February despite some drag from the Lunar New Year festive effect. While production output from the pharmaceutical segment has not been great, the electronics industry is now in the driving seat despite being in the doldrum for most part of last year.

Global electronics demand is recovering. Latest Feb12 US SEMI book-to-bill ratio registered 1.01, the first above-parity reading in seventeen months, signifying an expansion in the industry. Separately, spared for Eurozone PMI, the PMIs for key markets such as the US and China are pointing to expansion in the manufacturing sector and are heading further northwards. Plainly, expect a strong QoQ rebound in the manufacturing sector.

The services sector has been the key linchpin in keeping the economy afloat and in picking up some of the slack from the manufacturing sector, particularly in the fourth quarter last year. While the sector did have its fair share of the headwinds due to risk aversion in the financial markets from the debt crisis in Europe, underlying growth prospects for this sector has remained fairly stable.

A strong recovery in the equity markets as well as a healthy domestic loan growth will continue to keep the financial sector in good shape. The turnaround in the manufacturing sector is also likely to bring about better growth in the transportation and wholesale services sectors. In addition, the healthy tourist inflows of about one million tourists per month have continued to buttress growth in the tourism related sectors. Growth momentum in the services sector should continue to improve in the quarters ahead.

With growth momentum likely to be stronger and inflation more sticky (4.6% in Feb12) than what policymakers had previously anticipated, the MAS will most likely maintain its current policy stance of a gradual appreciation of the Sing Nominal Effective Exchange Rate (Sing NEER) in the upcoming policy review. Despite possible upside risk to inflation due to the high oil prices and buildup in domestic cost pressure from the ongoing restructuring, the authority is unlikely to pre-empt that for now.

Pockets of risk remain in the external environment and local manufacturers are struggling with the impact of higher labour costs. Further appreciation of the Sing dollar will be double whammy for the exporters. As such, keeping to the status quo remains the best option for the central bank for now.