Singapore’s GDP Decline Shows Manufacturing Constraint: Economy

Singapore’s economy unexpectedly contracted in the second quarter as higher labor costs and company moves to shift production overseas hurt manufacturing.

Gross domestic product fell an annualized 0.8 percent in the three months through June from the previous quarter, when it expanded a revised 1.6 percent, the trade ministry said in a statement today. The median of 17 estimates in a Bloomberg News survey was for a 2.4 percent gain.

Manufacturers including Western Digital Corp. have moved operations to other countries in recent years, as employers on the island grappled with tighter rules for foreign labor that have pushed up costs and crimped some companies’ ability to meet a recovery in demand from the U.S. and Europe. Singapore’s government has stepped up efforts to lure new industries such as research and development as it reshapes the economy while cutting reliance on cheap overseas workers.

“Economic activity is losing steam despite a healthier global backdrop,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, wrote in a note after the GDP report. “Restructuring appears to be failing. Growth is being impeded by tight labor constraints even as global demand recovers.”

The benchmark Straits Times Index of stocks fell 0.1 percent as of 2 p.m. local time. The Singapore dollar was little changed at S$1.241 against the U.S. currency. It has risen 0.5 percent so far this quarter. The central bank, which uses the island’s dollar to manage price pressure, said in April it will maintain a modest and gradual appreciation of the currency.

Tighter Labor

Singapore Prime Minister Lee Hsien Loong’s government has tightened rules to curb the hiring of foreigners in recent years after an influx led to voter discontent over infrastructure strains and increased competition for jobs, property and education.

“Some pockets of the manufacturing sector are already relocating,” said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore. “The manufacturing sector is facing tremendous pressure from the restructuring.”

The Monetary Authority of Singapore expects wage pressure to persist, with firms likely to pass on business costs, as a result of the tight labor market, it said in April when it kept its currency stance unchanged.

Basic wages excluding pension fund contributions rose 5.1 percent in 2013, the fastest pace in more than a decade, according to government data that isn’t adjusted for inflation. The jobless rate was 2 percent in the first quarter, compared with an average 2.2 percent in the previous five years.

About 25 percent of U.S. companies plan to move operations out of Singapore, rising from 12 percent last year, the Singapore Business Review reported in February, citing the 2013 Manpower Survey Results of the American Chamber of Commerce.

Manufacturing Slump

The economy expanded 2.1 percent in the three months through June from a year earlier, after growing a revised 4.7 percent in the previous three months, today’s report showed. That compares with the median estimate of a 3.1 percent gain in a Bloomberg survey.

Manufacturing fell 19.4 percent in the second quarter from the previous three months, data showed. Services rose 5.2 percent in the same period, while construction gained 2.6 percent.

In an earlier report showing electronics production fell in April from a year earlier, the government said semiconductor output fell 11 percent because of a one-off “firm-specific factor,” without elaborating.

“It’s part of this whole process of restructuring and moving up the value chain,” said Michael Wan, a Singapore-based economist at Credit Suisse Group AG. “Part of the reason of the weaknesses is that we saw some offshoring of this electronics factory in the second quarter.”

Global Growth

In a note to clients, Wan said the GDP report is unlikely to spur the MAS to ease policy as the labor market remains tight. The government in May reiterated its forecast for the economy to expand 2 percent to 4 percent this year.

“Moving forward, we should see some pick-up in industrial production as global growth improves,” said Wan. He expects the economy to rebound in the third quarter and predicts growth of 3.4 percent this year.

The advance GDP estimates for the second quarter are computed largely from data in the first two months of the quarter. They are intended as an early indication of GDP growth, and are subject to revision when more data becomes available.

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