Global Insight Perspective

Significance

Gross domestic product in real terms expanded 5.7% on the quarter and by 7.2% in annual terms; prompting the government to raise its official growth forecast for 2006.

Implications

External demand remained the main driver of growth, albeit on a moderating trend. Fresh momentum was generated by strengthening domestic demand as private consumption picked up amid robust employment growth.

Outlook

As growth sustains traction, Global Insight expects the economy to register growth of 8.0% in 2006, slowing to 5.5% in 2007 as exports decelerate amid easing demand in the United States and mainland China.

Maintaining Momentum

Growth sustained vigour in the third quarter of the year; becoming broader based. In the three months through September, GDP in real terms expanded 7.2% on the year. On a seasonally adjusted annualised basis the economy expanded 5.7%, accelerating from the 3.9% gain of the previous quarter. The strength of momentum prompted the Ministry of Trade and Industry (MITI) to raise its growth forecast to 7.5-8.0% in 2006 from a prior projection of 6.5-7.5%. It marks the third upward revision this year.

Outlook and Implications

External demand remained the central driver of growth, although exports moderated. In the three months through September, total external demand expanded by 9.6%, slowing from the 11.0% gain of the previous quarter. Exports expanded 12.0% on the year during the quarter following growth of 16.0% in the three months through June. The deceleration was attributed to easing demand for key electronics goods. However, imports also slowed as global oil prices fell off peaks, bolstering the net export position. The overall balance of payments accrued a S$4.0-billion (US$2.6-billion) surplus, down from S$5.1 billion the previous quarter as net outflows on the capital account offset the S$16.0-billion surplus recorded on the current account.

Domestic Demand in Recovery

However, some compensation was provided by a pick-up in domestic demand, which grew at an annual rate of 8.0%, up from 4.9% in the June quarter. The acceleration was driven by strengthening private consumption, which has remained below-par since the 2001 economic slowdown. Employment growth has risen to two-decade highs driven by robust rates of investment. Between June and September, employment rose 41,000, resulting in a decline in the unemployment rate to 2.7%. In the first nine months of the year, the number of new positions created in the economy stood at 123,100, in excess of the 113, 000 total recorded for the whole of 2005.

The positive trends appear set to continue. Fixed-asset investments in the manufacturing sector stood at S$2 billion in the three months through September, equalling the level recorded in the second quarter. Investment commitments in services stood at S$605 million. However, consumer price inflation remained weak, highlighting persisting deflationary pressures in the economy.

In sectoral terms, manufacturing and wholesale sectors continued to drive growth, although rates eased from the second quarter in line with slowing export growth. Manufacturing output expanded 10.6% on the year, down from growth of 12.7% in the June quarter. Service-sector growth remains fairly robust, at 6.5% in year-on-year terms, but was down from the 7.0% rate recorded in the June quarter, reflecting the weak performance of retail sales. Construction also continued its recovery, reflecting recent firming of real estate prices, rising 2.3% on the year following a 0.4% gain the second quarter.

Growth Set to Remain Stable as Risks Subside

The outturn was in line with Global Insight’s expectations, which underpin our annual forecast of 8.0% for 2006. Exports, which drove growth in the first half, have sustained considerable traction. Shipments are, however, expected to slow as growth in the United States slows below trend following a stronger-than-expected correction in the housing market, and tightening measures take effect in mainland China. Concurrently, inventory levels in the key semi-conductor sector have increased, indicating that demand will eventually slow. Nevertheless, forecasts indicate that global semi-conductor sales growth will remain relatively robust at around 9.0% in annual terms, compared to around 11.0% projected for this year. The stable deceleration in external demand will be partially offset by continued strengthening of private consumption and investment. One caveat remains the impact of pending increases to value-added tax (VAT) announced by the government last week. The low level of inflation will likely forestall any major adjustments in monetary policy, although the Monetary Authority of Singapore maintains a tightening stance. Given the balance of drivers, Global Insight forecasts that growth will slow to 5.5% in 2007 although risks remain weighted to the upside.

Contact: Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

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