Dismal start to 2015 for manufacturing

IT was a slow and disappointing start to 2015 for Singapore's manufacturing sector, which grew less than expected in January despite an undemanding year-ago base.

The surprisingly weak showing was due to a broad-based, uninspiring performance across all industrial clusters, save biomedical manufacturing and precision engineering.

Factory output rose just 0.9 per cent in January on a year-on-year basis, far lower than the market's consensus forecast of a 3.3 per cent increase. Strip out the volatile biomedical cluster, and the result would have been even worse: a zero-growth outcome with unchanged output.

With February's factory output expected to be weak on Chinese New Year plant closures, private-sector economists now say Q1 GDP growth is likely to come in under the government's 2015 GDP forecast range of 2-4 per cent.

Given how much the inflation outlook continues to be subdued - thanks in part to lower oil prices and new subsidies announced in Budget 2015 - at least one bank, Bank of America Merrill Lynch, thinks the Monetary Authority of Singapore (MAS) will ease policy further in April.

January's meagre rise in industrial production was thanks to the biomedical manufacturing cluster, which expanded 5.3 per cent - a turnaround from December's 1.2 per cent decline.

However, the 3.6 per cent growth in pharmaceuticals, coupled with a 4.1 per cent rise in precision engineering output, was not enough to offset contractions in the transport engineering (-2.2 per cent), chemicals (-0.5 per cent), and general manufacturing (-0.3 per cent) clusters.

Production in the key electronics cluster - which retains the largest weight of 33.4 per cent on the industrial production index - was unchanged in January.

Releasing the data on Thursday, the Singapore Economic Development Board (EDB) said that, after adjusting for seasonal factors, industrial production contracted 4.7 per cent month-on-month in January. Excluding biomedical manufacturing, output would have fallen 4.6 per cent.

This was also worse than the 2.4 per cent decline private-sector economists had anticipated, according to an earlier Bloomberg poll.

Economists expressed surprise at January's lower-than-projected growth in industrial production; those from Barclays and Credit Suisse had been expecting some front-loading of production last month, ahead of plant closures in February due to the Chinese New Year festive season.

"But that didn't come through, and so the risk is probably that February will continue to be weak, based on the holiday effect. The broader point is that the first quarter is likely to be quite subdued for manufacturing, especially when compared to the fourth quarter (of 2014)," said Credit Suisse's Michael Wan.

He believes Q1 GDP could decline about 0.4-0.8 per cent quarter-on- quarter in annualised terms. This, he says, would imply year-on-year GDP growth of up to 1.6 per cent in Q1, down from 2.1 per cent in Q4 last year.

Bank of America Merrill Lynch economist Chua Hak Bin agrees that Q1 GDP growth will come under the official 2015 projection of 2-4 per cent.

He also says that several Budget 2015 measures - medical and education subsidies, Service & Conservancy Charges rebates, and the deferment of foreign worker levies - could reduce inflation risks further.

Because of these factors, Dr Chua believes the central bank will ease monetary policy further at its April meeting - even after it surprised in January by reducing the slope of the S$NEER (Singapore dollar nominal effective exchange rate) policy band.

He said: "MAS will likely re-centre the band lower to the prevailing level of the S$NEER. We expect MAS to maintain the current weak appreciation bias. We are not expecting MAS to shift to a neutral bias (of zero appreciation) as such a move is more drastic and occurs largely only in recessions and crises.

We are not expecting a recession, but we think there is a high probability that the government will have to reduce the GDP growth forecast to 1-3 per cent before midyear, from the current 2-4 per cent."

Dr Chua also told BT that "unless productivity growth really comes to the rescue", one per cent GDP growth per year "is probably a good number" in the longer term.

While Credit Suisse's Mr Wan now sees a higher risk of MAS easing, neither he nor economists from Citi or CIMB see this as their base case.

Said CIMB's Mr Song: "Monetary policy was recently revised, and I think MAS has taken all of these (inflation and growth) factors into consideration already. So I don't see any further easing especially after the last round - unless we have a further significant downshift in either growth or inflation."

This article was first published on Feb 27, 2015.
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