Strong Growth Trend Maintained
Aug 10, 2006
Deyi Tan (Singapore)
Second quarter GDP decelerated to 8.1%
After recording revised 10.8% YoY growth during the quarter ended March 2006, GDP grew by 8.1% YoY during the quarter ended June 2006. This is higher than the government’s advance estimate of 7.5% YoY but nonetheless unsurprising, given the strong June industrial production numbers. On a sequential annualised basis, the economy rose 3.0%. Specifically, momentum on the external front moderated in 2Q06, with the growth contribution falling from 8.0%-pt to 5.2%-pt, though this remains a respectable 64% of headline growth. Meanwhile, domestic demand strengthened slightly. In particular, private consumption strength rebounded to 4.2% YoY, moving more in line with retail sales numbers after weak residents’ overseas spending reduced the number in 1Q06. Less inventory de-stocking also helped. Meanwhile, momentum in fixed capital formation surged to 11.1% YoY. Given the high export-orientation of the economy, fixed investment into machinery and equipment, typically correlated with the export cycle, moderated to 16.3% YoY (versus +19.1% in 1Q06). On the construction front, property asset reflation is taking time to trickle down into real residential construction. Momentum in the latter is patchy, at -2.2% YoY (+1.5% YoY). However, non-residential construction picked up strongly at 14.6% YoY (versus +8.8% YoY). Lastly, government consumption growth fell slightly to 7.6% YoY. On the supply side, both manufacturing and services segments moderated. Manufacturing production registered 12.5% YoY (versus +20.7% in 1Q06) as both electronics and biomedicals saw weaker performances. Growth in the services industry also decelerated to 7.0% YoY from 8.2% YoY. Specifically, services segments such as wholesale & retail (+10.1% YoY versus +15.1% in 1Q) and transport & communications (+3.7% versus 5.0%) decelerated. The business segment sustained growth at 6.4% YoY (versus +6.5%) while pockets of strength were seen in segments such as financial services, which accelerated to 9.5% from 8.7%. 2H06 outlook We expect private consumption to be sustained in 2H06, underpinned by the artificial boost from the progress package handouts in the FY2006 budget, the bulk of which (1.1% of GDP) has been disbursed in May. However, we will likely see some softening on the external balance side. ISM, which leads NODX by about five months, is pointing to some softening ahead. On the fixed investment front, we would probably see mixed trends. We expect machinery and equipment to weaken with the export cycle. Nonetheless, construction, more notably in non-residential and to a lesser extent in residential property, is likely to pick up pace. Specifically, projects such as the integrated resorts, the business financial centre and revamp of existing tourism sites are expected to add at least an average of 1%-pt to growth over the next five years. Upgrading our 2006 growth estimate We are upgrading our 2006 growth estimate to 7.5% from 5.5% on the back of extremely robust 1H06 growth, in particular stronger-than-expected external demand, fixed investment and government expenditure. However, we are cutting our 2007 growth marginally to 5.0% from 5.2% on base effects.
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