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SINGAPORE's first manufacturing data point this new year was bad news for the sector. Falling to its lowest in close to two years, December's purchasing managers' index (PMI) pointed to industrial activity contracting. This, after three months of expansion, showed that Singapore has not after all defied waning production momentum across Asia. (see infographic)
The overall PMI reading of 49.6 for last month, down from 51.8 in November, was worse than expected. The market's consensus forecast, according to Bloomberg, was for a milder fall to 51. That would have kept it above the 50-point threshold that separates readings pointing to growth, from those that spell contraction.
But Asia's factories generally have ended the year on a quieter note, with weaker December PMIs from China, Taiwan and Indonesia too. Though South Korea's PMI improved for a second straight month in December, it remained below 50, denoting contraction.
"With regional economies also experiencing sagging manufacturing momentum, Singapore will not be immune," said Mizuho Bank economist Vishnu Varathan. In particular, indicators from China - the official PMI fell to its lowest reading in 1.5 years of 50.1 and the HSBC PMI was a sub-50 49.6 - suggest that the ride ahead may be bumpy, he said.
Chief of the factors dragging December's PMI lower, was a fall in new orders, said the Singapore Institute of Purchasing and Materials Management (SIPMM), which compiles the PMI monthly from its survey of purchasing managers at more than 150 industrial companies.
While new export orders still showed mild expansion, the new orders sub-index fell a sharp 3.7 points to a reading of 49.6. This was the sharpest plunge in new orders since 2009, after the great financial crisis, said CIMB economist Song Seng Wun.
The key electronics sector's PMI kept above 50, slipping slightly from November's 50.6 to 50.5 last month. Noting that both new order and new export orders sub-indices for electronics rose slightly, OCBC economist Selena Ling said that this is in line with improvement in US semiconductor book-to-bill ratio, which rose above one in November.
However, new electronics export orders stayed in contraction for a second straight month, and production and other electronics indicators declined from November's levels too.
Credit Suisse economist Michael Wan said that flash Q4 GDP estimates implied a 1.5-2 per cent month-on-month increase in December's manufacturing output. In year-on-year terms, most economists are expecting a 3 per cent fall in December's industrial production.
With the latest PMI, Mr Wan thinks production may not have risen as much, and that Q4 GDP could be revised downwards as a result.
But manufacturing is not about to plunge into the depths of contraction, and there is no need for undue alarm over the sub-50 reading, said Mr Varathan. One silver lining could be that inventory and finished goods have remained low, which could point to more nimble manufacturing - a plus in the current situation of patchy demand, he said.
The low inventory levels could be because customers are cautious about demand in the coming months, or waiting for prices to fall, said Mr Song. "They could also be watching the rout in international energy prices, and are delaying bookings and depleting inventories in anticipation that raw-material costs will follow suit."
Also, industrial activity does tend to wind down in the month of December, said Barclays economist Leong Wai Ho. The PMI for December 2013 was 49.7 and that for December 2012 was 48.6.
"One factor weighing on purchasing activity is the regular maintenance cycle of refineries and petrochemical facilities, which appears to be more squarely centred on December this year than in previous years," Mr Leong said.
He still holds some optimism for the manufacturing sector. "This print in itself is not an indication of the trend in 2015, which we expect will show growth - in tandem with the recovering US economy."
For the rest of this first quarter of 2015, however, expect manufacturing to remain subdued, said Mr Varathan. The Chinese New Year holidays' usual disruption and uncertainties in the eurozone over Greece's election will add to the overall weak external demand, he said.