Woeful Growth In Singapore Is Reassured

Includes: EWS, SGF
by: Reid K.

By Henry Skinner

Singapore's GDP grew far less than what economists had hoped in Q2 with a 1.7% growth being reported - a somewhat dismal performance following a 2.8% growth for Q1.

Critics have suggested that Singapore's contracting manufacturing sector is to blame, which reported a 4.0% decline in Q2 following a 2.7% decline from Q1, though it can be said that their goods producing industry, in general, is suffering, with bio-medical manufacturing and transport engineering clusters being the main cause.

However, firms are trying to counteract this decline, with 70% of manufacturing firms planning to invest in new machinery and other innovative technologies between April 2015-March 2016. Ultimately, this will enable such firms to stabilize the manufacturing sector by expanding production capacity and reaching export goals.

Given the continual decline in such clusters, this initiative should facilitate the revitalization of manufacturing in the Singaporean economy, though more 'dated' initiatives should arguably be reviewed too, and applicably instated to encourage positive economic activity in specific failing sectors, such as the Singapore Transitional Research (STaR) Investigator Award in Biomedicine.

The economic contraction is also said to be the result of poor Q1s experienced in the USA and Europe, for a number of reasons, fundamentally meaning that demand for certain export goods declined.

Third Quarter to Prove More Fruitful

Yet, it is not all bad news, as some significant deals have been struck in more recent weeks, which will appear in Q3, perhaps rebutting the decline in certain sectors; a $335m deal with Japanese pharmaceutical firm, Chugai (OTCPK:CHGCF) (OTCPK:CHGCY), was announced in mid-June. A $920m deal for ST Aerospace Ltd. (an arm of Singapore Technologies Engineering ltd.), another example of where the economy may be able to rekindle its decline.

Nonetheless, although the economy has seen this significant downturn, other sectors have been performing well, with most service-producing industries growing at a healthy rate, well within the proposed 2-4% growth ideal. The Finance and Insurance sector for example grew 7.9% in Q1 alone, promising further growth into Q2, with other sectors such as Construction also offering commendable development.

However, the overall balance of industries has meant that the GDP growth for Q2 2015 has slowed to 1.7%, which in turn gives the Singaporean government a challenge to rectify this in Q3 and beyond. As commented, significant movements have already been made, and it can be said that the Singaporean economy will return to its former self, perhaps with a bolstering effort from the finance industry.

A Shift in Industries?

New York blogger Dominic Basulto acknowledges Singapore's innovative abilities, and commends the country on how well they have and can adapt to changing global economic conditions, specifically within innovative industries, (see the Jurong Island project).

Singapore's track record of innovation is somewhat staggering, given their economic history in the past 50 years, transitioning through many stages of economic development in very little time. But does this mean they will respond effectively to the slowdown from the results of Q2? The answer is most likely yes, though Basulto also notes that the slowing of the Chinese economy may also have an effect on Singapore's outlook.

Thus, Singapore has proven, on many occasions, its ability to respond to dynamic economic conditions, especially in recent years. With the US supposedly regaining strength from Q1, and China too, stabilising after a turbulent few months, the MIT (Ministry of Trade and Industry) has reassured the Singaporean economy is 'unlikely to weaken further'. Subsequently, this means although the decline of certain sectors may be occurring now, which may be the result of the macroeconomic environment, it's not to say that other, and new, sectors will blossom in months to come.

In the meantime, it may be a better choice to stay away from stocks in Singapore and invest in emerging markets nearby instead. No matter where you are based, diversification is important. Remember that just as investing in a single stock is risky, investing in a single country is also risky.