Technical recession back on the radar

SINGAPORE - Continued weakness in the electronics cluster meant that the manufacturing sector's return to growth in November was not convincing enough to quash talk of a fourth quarter technical recession. In fact, full-year GDP growth may end up being lower than the official forecast of 1.5 per cent, some economists say.

Industrial production grew 3.1 per cent from last November, bouncing back from a deeper revised contraction of 5.1 per cent in October. But it still fell short of economists' consensus forecast of 4.8 per cent growth from last November's lower base, due to supply disruptions caused by flooding in Thailand.

But that did not happen despite a 12.9 per cent rise in biomedical production from a year ago, a rebound from the cluster's 20.3 per cent contraction in October.

Excluding biomedical output, factory output in November rose a far slimmer 0.9 per cent year on year, data released by the Economic Development Board (EDB) yesterday shows.

Compared to October, industrial output grew 1.9 per cent month-on-month after seasonal adjustments, or 0.6 per cent if biomedical gains were stripped out.

Electronics proved to be the main drag again, although the pace of contraction slowed to 2.3 per cent from a 9.1 per cent year- on-year dip in October. But semiconductors, the biggest electronics segment which accounts for 20 per cent of total factory output, sank 11 per cent year-on- year in November, slightly more than the 10.4 per cent dip in October.

Citi economists Kit Wei Zheng and Brian Tan estimate a small 0.7 per cent month-on-month expansion in electronics after seasonal adjustments, largely due to higher computer peripherals, data storage and electronics modules and components.

By their estimates, electronics has now risen sequentially for two straight months, consistent with signals from leading indicators of electronics demand, they say.

"Nonetheless, the sequential expansion remains very mild . . . we expect tech to remain lacklustre in the next few months, though we do not expect a sharp decline from current depressed levels," the Citi economists said.

UOB economists said in a research note: "The weakness in electronics continued to reinforce the view that Singapore's electronics industry is not benefiting from the global demand from smartphones and tablets, relative to the North Asian economies."

The Citi economists also noted that Singapore's industrial production and exports numbers contrast sharply with those of recovering North Asian peers. This "may suggest that demand issues aside, a combination of real effective exchange rate appreciation and labour supply constraints may be beginning to weigh on the manufacturing sector".

Transport engineering grew 4 per cent year-on- year in November, after slipping 0.6 per cent in October, thanks to higher production of oilfield equipment components and the completion and delivery of some marine vessels, EDB said.

But most of the other clusters' growth weakened in November. Chemicals growth slowed to 5.2 per cent year-on-year growth in November from 13.4 per cent in October due to slower growth in petroleum and petrochemicals production.

Precision engineering shrank 0.2 per cent, after expanding 4.3 per cent in October, while general manufacturing growth slowed to one per cent in November from 4.6 per cent the month before.

With two months of manufacturing performance now in, some economists say that GDP would probably shrink quarter on quarter in Q4. This would be the second quarter of sequential contraction in a row, implying a technical recession.

Both Citi and OCBC's economists now estimate that the Singapore economy would grow just 1.1 per cent year on year, under the latest official GDP forecast of "about 1.5 per cent" growth.

Prime Minister Lee Hsien Loong said earlier this month that it would be wise to expect the final number to be "lower than 1.5 per cent". He is expected to announce the advance estimate for full-year GDP in his annual New Year Message next week.

"Going into Q1 2013, the headwinds for external demand still look fairly formidable, especially with the looming threat of the US economy falling off the fiscal cliff. As such, manufacturing activity could continue to underperform in the interim," said OCBC economist Selena Ling.