BT: S'pore headed for 8.5% growth: CS (07 Jul 2006)

S'pore headed for 8.5% growth: CS
By ANNA TEO

(SINGAPORE) Credit Suisse has raised its forecast for Singapore's 2006 economic growth to a new high of 8.5 per cent - about 2 percentage points above consensus - on the back of strong domestic demand.

Other economists, however, aren't quite as upbeat, maintaining that the resilience of the domestic economy - not just Singapore's but across Asia - is overstated. Exports remain the key growth driver in Singapore and the region, they say, and the risk of a slowdown in US consumer spending points to a cooler second half for Asia.

After an 'exuberant' 10.6 per cent first-quarter growth, the Singapore economy is widely expected to have seen slower expansion of 6-7 per cent in the second quarter.

Economists from both Credit Suisse and United Overseas Bank, for instance, forecast Q2 GDP growth of 6.5 per cent. A poll of 20 economists and analysts in mid-May by the Monetary Authority of Singapore produced a median forecast of 7.2 per cent GDP growth for Q2, and slower growth of 5.5 per cent and 4.2 per cent in the following two quarters.

The Ministry of Trade and Industry will announce the flash Q2 GDP growth estimate - based on just April and May data - on Monday morning.

While the consensus view sees a slower second half, Credit Suisse senior regional economist Sailesh Jha predicts an acceleration in Singapore's GDP growth to 8.5 per cent in the July-December period as consumer spending picks up.

'We believe the domestic economy will continue to surprise on the upside,' says Mr Jha in an Emerging Markets Research report on Singapore. While exports will remain a key driver of growth, domestic spending may become 'just as important in 2006', he adds.

Mr Jha reckons consumer spending may be the key propellant for growth in the second half, with income and employment prospects being bright, and with the wealth effect from a rising property market and resilient stock market.

He forecasts a sharp jump in consumer spending growth to 10.7 per cent in the 2006 second half, from 2.5 per cent in the first half.

Strong corporate profit margins may also spur investment spending, particularly in the first half of 2007, and following a projected rebound in US investment spending in the second half of 2006.

Credit Suisse's forecasts see a slower 7 per cent growth in investment spending in the 2006 second half due to base effects (from 11 per cent in H1), before a pick-up next year. Year-round, investment spending is projected to grow a faster 9 per cent or so in 2006, from an earlier forecast of 6 per cent. On this, Credit Suisse has raised its 2006 GDP growth forecast by 1.5-point to 8.5 per cent.

UOB's economists are also upbeat about domestic demand - and 'moderately positive' on the domestic electronics outlook - despite having pared down their forecasts of Q2 manufacturing and GDP growth.

Their 6.5 per cent Q2 GDP growth forecast translates to a 2.4 per cent quarter-on-quarter annualised contraction. Still, the idea of the Singapore economy running into a recession 'remains a bit far-fetched for now', they say.

That statement alludes, perhaps, to recent reports by Citigroup that have dredged up the R-word - the bank's studies show a link between sharp stockmarket corrections and subsequent recessions or economic slowdowns over the past two decades.

Fairly bearish of late, Citigroup points out in an economic briefing this week that the slowdown in Singapore's non-oil domestic exports and re-exports - as well as its own forecast of 6.5 per cent 2006 GDP growth - are consistent with expectations of a second-half slowdown.

The rise in Singapore's June purchasing managers' index 'should not be seen as a sign of a renewed pick-up in manufacturing momentum, given conflicting signals from the less than flattering dips in the tech and employment gauges,' says Citigroup economist Sim Moh Siong. He warns of a likely pullback in the PMI in the next few months - following similar slowdowns in the US and Hong Kong.

The bank says economic growth across Asia will slow in the second half, primarily on a slowdown in demand from the US. And, as an open economy, Singapore is more exposed than other Asian economies to a US slowdown: A one-point decrease in US economic growth could cut Singapore's GDP growth by 1.7 points.

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