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UPDATE 3-Singapore avoids Q2 contraction, but slowing services sector a risk
August 12, 2014 / 5:12 AM / 3 years ago

UPDATE 3-Singapore avoids Q2 contraction, but slowing services sector a risk

* Q2 final GDP +0.1 pct q/q vs -0.1 pct seen in Reuters poll

* Manufacturing fell less than previously estimated

* Services sector seen slowing in second half of the year (Writes through, adds background)

By Jongwoo Cheon and Masayuki Kitano

SINGAPORE, Aug 12 (Reuters) - Singapore's economy avoided shrinking in the second quarter of 2014 as the manufacturing sector slowed less than previously estimated, though weakness in the services sector is set to weigh on growth in the second half of the year.

The economy grew at an annualised rate of 0.1 percent in the three months to June compared with the previous quarter, an improvement on the government's prior estimate of a 0.8 percent contraction and beating analyst forecasts for a fall of 0.1 percent. (Click here for table of growth numbers )

However the performance still marked a sharp slowdown from growth in the first quarter of the year and economists warn that government policies to curb the influx of foreign labour are likely to be a drag on the economy in the near term.

"We think growth is likely to remain subdued in the second half on the back of wage pressures, and the ongoing rebalancing of Singapore's economy," Joseph Incalcaterra, an HSBC economist in Hong Kong, wrote in a research note.

The government's push to reduce a politically unpopular reliance on overseas workers has led to a tight labour market, driving up wage pressures and raising business-related costs.

MANUFACTURING NEARS BOTTOM

A slowdown in manufacturing was the biggest drag in the second quarter, though signs of a gradual recovery in the United States and China mean the sector may now have reached a bottom.

In July, manufacturing activity expanded at its fastest rate in a year as orders in the key electronic sector surged, a survey showed last week.

By contrast, growth in the services sector has fallen on a year-on-year basis for the past three quarters, a trend analysts believe could continue as companies face higher wage bills and a housing market slowdown.

"The falling property cycle has got some room to grow and that's going to take some activity out from the banking and wider finance sector," said Wai Ho Leong, senior regional economist at Barclays in Singapore.

Activity in the housing market has plunged this year as a result of measures brought in by the government to limit consumer borrowing, with banks reporting that their new mortgage business is down by around 40 percent.

Services accounted for about 70 percent of Singapore's gross domestic product (GDP) in 2013 while goods-producing industries made up just over 20 percent.

FORECASTS CUT

The economy's sluggish performance in the second quarter means official forecasts for 2014 as a whole have been lowered.

Trade agency International Enterprise Singapore on Tuesday revised down its 2014 non-oil domestic exports forecast to a 1.0-2.0 percent contraction from the previous expectation for 1.0-3.0 percent growth.

That follows the weak performance by the trade-dependent manufacturing sector, particularly the electronics industry. Manufacturing activity fell 15.2 percent in April-June from the previous quarter on a seasonally adjusted and annualised basis. That compared with the advance estimate of a 19.4 percent contraction released on July 14.

The government also narrowed its growth estimates for the year to between 2.5 percent and 3.5 percent from 2 percent and 4 percent previously. (Additional reporting and writing by Rachel Armstrong; Editing by Eric Meijer and Jacqueline Wong)

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