February factory output growth beats 10% analyst forecast

Singapore

ECONOMISTS in Singapore are keeping a close watch on a scheduled monetary policy statement due early April, following Friday's release of factory output data that showed a broader uplift for the manufacturing sector.

This isn't because they expect a policy shift, but because they need to read the tea leaves on whether a tightening move will happen later this year.

Friday's data showed that factory output in February continued to grow. It grew by 12.6 per cent from a year ago, beating economists' expectations of a 10 per cent increase. Excluding biomedical manufacturing, output grew a stronger 17.1 per cent from February 2016. The volatile biomedical cluster had fallen by 2.6 per cent.

Last October, the Monetary Authority of Singapore (MAS) had said in its biannual policy review statement that, in expecting growth not to pick up significantly into 2017, it would maintain a neutral policy stance for an "extended period".

Now, with industrial production continuing to surprise in recent months, growth is expected to come in stronger than expected.

However, economists do not think that MAS will make a policy move in April.

Instead, economists such as J P Morgan's Benjamin Shatil and Citi's Kit Wei Zheng argued that how the April statement is phrased will give clues as to whether MAS will lean towards tightening its stance later this year.

"We would watch for changes to the October 2016 guidance of an 'extended period' of a flat slope, with any removal providing MAS the option of tightening in October 2017," said Mr Kit.

This is because even though growth is firmer, inflation is still below a level that "appears consistent with the long-run average", said Mr Shatil.

This may be due to better productivity gains which may dampen price increases. A weaker jobs market will also hold demand-led inflation back.

Global uncertainties will also weigh on growth trajectory. "We need to be watchful of the anti-globalisation antics from the developed world such as the US and the EU," said Francis Tan, economist at UOB.

But even so, economists are taking heart from February's factory output data, as they pointed towards a broader uplift for the economy.

Headline factory output increase, driven primarily by the electronics cluster, jumped 39.8 per cent compared to the same month last year. This was in turn mainly due to the semiconductors segment posting growth of 63.6 per cent.

Strong demand for semiconductors is also lifting the performance of another cluster. Precision engineering cluster output expanded 26.2 per cent year-on-year "on the back of higher export demand for semiconductor-related equipment".

Taken together, electronics' continued expansion and its effects spilling over into the precision engineering cluster "reflect an improving global electronics demand", said DBS economist Irvin Seah. "As long as global outlook continues to improve, growth performance in the electronics and related clusters should remain buoyant."

Chua Hak Bin, economist at Maybank Kim Eng, said: "There are visible signs that the export-led recovery is broadening to services. Wholesale trade, finance, and business services should see growth improving."

There was some concern, however, of a slower rate of growth. The combined January and February output this year may mean that first-quarter 2017 gross domestic product (GDP) will see a small sequential contraction of between 0 to negative one per cent, said Citi's Mr Kit. Flash Q1 GDP data will be out in early April.

But this contraction is mainly a "technical payback" that erases a very small portion of the step-up seen in late last year, added Mr Kit. "Overall, the data suggests Singapore continued to benefit from the regional upturn in the technology cycle in Q1."