Factory output fall revives technical recession chatter

Factory output fall revives technical recession chatter

TALK of a third-quarter technical recession was revived on Monday, after data showed that manufacturing output continued to contract for the eighth straight month in September. Industrial production dropped 4.8 per cent year on year last month - although the pace of decline eased from August's 7.1 per cent fall.

A technical recession is defined as two straight quarters of sequential contraction in GDP (gross domestic product) - something Singapore has narrowly dodged in Q3, according to advance growth estimates by the Ministry of Trade and Industry (MTI).

However, since September's drop in factory output was worse than the market had forecast, and because July and August's industrial production data were both revised downwards, the likelihood of a technical recession was again on the cards on Monday, after the Economic Development Board (EDB) released September's factory output statistics.

Said Bank of America Merrill Lynch (BAML) economist Chua Hak Bin: "Risk of a technical recession in Q3 is back on the table, judging by the revised set of industrial production data. MTI's flash estimate showed that Singapore only very narrowly missed slipping into a technical recession with 0.1 per cent quarter-on-quarter seasonally-adjusted annualised growth in Q3. But manufacturing likely contracted at a sharper pace in Q3 year on year (-6.2 per cent) than flash estimates implied (-6 per cent).

"All else equal, we estimate that third quarter GDP growth could be revised downwards to 1.3 per cent year on year, or about -0.4 per cent quarter on quarter."

Apart from the biomedical manufacturing and chemicals clusters, all clusters posted a drop in production in September. In fact, excluding the volatile biomedical manufacturing cluster - which pulled the overall year-on-year figure up with a large 26.3 per cent expansion - factory output would have fallen a greater 10.2 per cent.

The electronics cluster, which retains the largest weight of 33.4 per cent on the index, stayed in contraction mode in September. Production shrank 8.6 per cent, dragged down by a 12 per cent decline in semiconductor output.

The worst-performing cluster was transport engineering, which holds the third-largest weight on the index. Its output dropped 24 per cent in September, with all segments registering declines. "The marine & offshore engineering segment led the decline, as a result of lower levels of rig building and ship building activities," said the EDB. Output of the general manufacturing and precision engineering clusters decreased 4.7 per cent and 8.7 per cent year on year respectively.

The chemicals cluster, however, expanded 4.4 per cent.

The EDB said that after adjusting for seasonal factors, industrial production increased 0.5 per cent in September. If biomedical manufacturing is stripped out, output would have risen 0.3 per cent.

Noting the disappointing data, Barclays economists Leong Wai Ho and Angela Hsieh said: "Overall, the improvement in industrial production on a year-on-year basis was helped by a 29.2 per cent surge in pharmaceuticals output . . . Even then, the boost from pharma was due to the low base last year, with production remaining almost unchanged in level terms."

UOB economist Francis Tan downgraded his 2015 industrial production growth forecast to a 2 per cent contraction, from a one per cent decline projected earlier.

He told The Business Times: "With yet another month of lousy data, we're seeing that this minus-one per cent is very hard to reach, because year to date we're already seeing a -4.5 per cent reading."

Therefore, he and BAML's Dr Chua agree that Singapore will likely revisit the issue of a technical recession come mid-November, when the MTI publishes its final reading of Q3 GDP growth.

Still, OCBC economist Selena Ling added: "However, we may have to wait for the September retail sales which could portend any upward revision to the Q3 services growth, and in turn offset any downside risk of the Q3 flash GDP print from potentially tilting back into a technical recession."

This article was first published on October 27, 2015.
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