Sharpest manufacturing plunge in over two years points to weak Q2 GDP
Some economists even expect Q2's numbers to be weaker than Q1's
IT WOULD be easy to blame April's 8.7 per cent plunge in industrial output - the steepest year-on-year decline in more than two years - on the volatile pharmaceuticals sector's 38 per cent contraction.
But economists say that weakness showed up in other manufacturing clusters too, confirming what April's purchasing managers' index (PMI) had suggested: Singapore's economy has had a weak start in Q2. Some now believe that GDP for the current quarter could shrink from Q1's levels - which were revised higher on Tuesday.
Lower production of active pharmaceutical ingredients and biological products led the pharma segment to shed close to two-fifths of last April's high output base; this outweighed the medical technology segment's robust 28.1 per cent growth and dragged overall output from the biomedical cluster 28.6 per cent lower year-on-year.
Excluding biomedical manufacturing, the fall in April's industrial output would have been a milder 1.9 per cent, but the unpredictable pharmaceuticals sector was not the sole reason that manufacturing's third straight month of contraction was deeper than the 3.6 per cent drop economists had forecast.
Other clusters showed weakness too. Transport engineering contracted 8.7 per cent year-on-year as demand for engine repair jobs in the aerospace segment stayed weak; lower levels of rig-building activity shrank the marine and offshore engineering segment too, the Economic Development Board (EDB) said.
The general manufacturing cluster shrank 5.1 per cent year-on-year due to fall in production of wearable apparel and construction-related products such as metal doors, windows, grilles and gratings.
April's strongest performer was the chemicals cluster, which grew 3.9 per cent year-on-year as plants in the specialities and petrochemicals segments expanded production capacity.
A key reason for economists' lack of optimism was the electronics cluster's unconvincing return to growth. The cluster grew 1.2 per cent year-on-year in April after four straight months of contraction.
But this was in part due to low-base effects - the closing of a firm that lowered electronics output for most of 2014 was first mentioned in April last year. And despite double-digit growth in segments such as data storage, electronics modules and components and computer peripherals, semiconductors (which accounts for two thirds of electronics output) shrank 7.2 per cent year-on-year.
JP Morgan economist Benjamin Shatil said: "The hope was that new tech product launches would provide some support to electronics production in early Q2, but last week's trade data and production reports from other emerging market Asian exporters are sending no clear signal of lift in the region."
The outlook for electronics remains unclear, said OCBC economist Selena Ling.
"While the North American semiconductor book-to-bill ratio rose further in April, the domestic electronics PMI sank back into contraction territory, suggesting that Singapore may not be fully latching on to the uptick in global demand for electronics as yet," she said.
These and other dynamics do not paint an optimistic outlook for the overall manufacturing sector.
Demand for Singapore's pharmaceutical exports could slow further in the months ahead, as the euro continues to depreciate against the Singapore dollar, said UOB economists Francis Tan and Jimmy Koh.
Global oil prices heading higher could erode the profit margins of manufacturers through higher fuel or electricity costs, though higher oil prices may end the marine and offshore engineering cluster's orders drought, they added.
Domestic labour constraints are dampening any improvement in external demand, and structural shifts in manufacturing have led to Singapore losing market share to other regional exporters, including Vietnam, said Mr Shatil.
HSBC economist Joseph Incalcaterra, who expects industrial output in Q2 to stay flat, said: "Most signs point to manufacturing staying weak - potentially even deteriorating - going forward."
With these headwinds to growth, and April's weaker-than-expected manufacturing performance, at least two banks - Credit Suisse and Citi - believe that Singapore's Q2 GDP could moderate, or even contract, on a quarter-on-quarter basis.
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