• Growth in service sector production unexpectedly slowed to 4.1% YoY in 3Q15 from 5.0% in 2Q15 as measured by the Index of Services.
• The slowdown was concentrated in the Finance, Real Estate and Professional Services sub-sector, which contracted 0.9% YoY.
• The poor index reading suggests that value-added services probably grew by far less than our 3Q15 estimate of 5.3% YoY growth.
• Given the importance of the services sector, 3Q15 GDP growth could likely report on Thursday below our 5.1% YoY estimate and closer to the consensus
• estimate of 4.7%.
• The poor performance of the services sector can be attributed to unfavorable operating conditions for the finance and real estate industries and to a lesser extent, the adverse effect of the April implementation of the Goods and Services Tax (GST).
• A mild rebound in the services sector growth is possible in 4Q15, but would probably still result in full-year GDP growth on the lower end of our 5.0% - 5.3% forecast range.
• The services sector probably experienced the slowest growth in more than two years in 3Q15, with the Index of Services showing an expansion just 4.1% YoY and 2.5% QoQ. Services are by far the largest sector of the economy, making up 53.3% of GDP in 1H15.
• For comparison, growth in the index slowed to 5.0% YoY in 2Q15 largely due to the April implementation of GST after consistently growing by more than 6.0% for six consecutive quarters.
• Of the three major sub-sectors, Finance, Real Estate and Professional Services performed the worst, contracting 0.9% YoY after growing 2.3% (revised) in 2Q15. The sub-sector makes up 28.4% of the index.
• The sub-index tracking just the Finance and Insurance Services industry fell 3.3% YoY. The industry is facing narrowing margins and high operating costs, which led some banking groups to downsize their staff count this year.
• The sub-index tracking just the Real Estate Services industry saw growth slowed to 3.9% YoY from 4.7% in 2Q15 on unfavorable operating conditions for property developers and related businesses.
• The Distributive Trade, Food & Beverages and Accommodation sub-sector (44.5% weight) saw a slight moderation in growth to 5.2% YoY from 5.4% (revised) in 2Q15. The sub-sector grew 1.5% QoQ as consumer spending recovered from a GST-induced slump in 2Q15.
• The Communication and Transport & Storage sub-sector (21.2% weight) saw a slight improvement in growth to 7.7% YoY from 7.5% (revised) in 2Q15. All three major sectors saw positive QoQ growth.

Source: Kenanga Research - 11 Nov 2015