Manufacturing: Hopes for a better 2nd half

Singapore

AND so it seems - as it did last year - that hopes are once more high for a manufacturing recovery in the second half of the year. The question is whether that elusive comeback will actually materialise this time around.

This comes as Singapore's manufacturing sector contracted for the fourth straight month in May, with industrial output falling 2.3 per cent on a year-on-year basis through broad-based declines in all clusters, save chemicals.

While still in negative territory, the latest factory output reading marked an improvement from April's sharp 9.1 per cent drop, revised from an earlier estimate of an 8.7 per cent decline. It was also a better-than-expected reading; the 18 private-sector economists polled by Bloomberg before the Singapore Economic Development Board (EDB) released the data on Friday had been expecting factory output to fall by a larger 2.6 per cent.

The figure for May had led economists to believe that a bottoming-out of the manufacturing slump is on the horizon, although they cautioned that challenges from a tepid global economy remained.

They say that the sector's recovery will be predicated on a pickup in external demand - particularly from China and the US.

OCBC economist Selena Ling told The Business Times: "I don't really think we have strong hopes for a quick turnaround in manufacturing, but I don't think that the recovery has been derailed either ... We're still pencilling in a modest second half rebound story."

Echoing her view was Mizuho economist Vishnu Varathan, who added: "We'll need to see something more durable in terms of external demand first, but I think we do see a gradual recovery taking place; manufacturing is not going to continue collapsing.

All indicators suggest that there's a near bottoming and gradual recovery from here ... It's a nagging sense of déjà vu, because we all said this last year, and here we are again."

Excluding biomedical output, which fell 2.6 per cent in May but was still a bounce from April's 29.4 per cent plunge, industrial production would have contracted 2.2 per cent.

Output of all clusters contracted last month, except chemicals. That cluster grew by 1.3 per cent, as the specialties and petroleum segments increased 3 per cent and 6.5 per cent respectively. The electronics cluster had the smallest drop in output, a 0.2 per cent decline. Data storage grew 46.9 per cent, other electronics modules & components, by 43.9 per cent, and computer peripherals, by 9.8 per cent, but this was offset by declines in the semiconductors (-9.3 per cent) and infocomms & consumer electronics (-11.8 per cent) segments.

The transport engineering cluster performed the worst - it fell 8.1 per cent year-on-year in May 2015with all segments posting lower output. EDB said the marine & offshore engineering segment contracted 5.2 per cent due to lower levels of rig-building activities; meanwhile, demand for engine-repair jobs remained weak, contributing to a 13.2 per cent decline in the aerospace segment.

Output of the remaining clusters - precision engineering and general manufacturing - contracted 1.6 per cent and 2.4 per cent respectively.

After adjusting for seasonal factors, industrial production went up 2.4 per cent month-on-month in May. Excluding biomedical manufacturing, output would have grown 1.1 per cent.

Given May's numbers, economists agree that the manufacturing sector is likely to contract in Q2 in year-on-year terms for the third consecutive quarter. Estimates for Q2 GDP (gross domestic product) remain weak. Bank of America Merrill Lynch expects advance estimates to show just a 1.7 per cent expansion year-on-year; Citi anticipates a "modest sequential drop".

DBS economist Irvin Seah acknowledged the "glimmers of hope" for the sector, but said this year 2015 would be a trying one for manufacturers: "Manufacturing PMI (purchasing managers' index) was finally back in expansion mode for May. The headline number rose by 0.8 of a point to register 50.2 - the first expansion in six months. The latest set of figures, together with the PMIs of key markets, may suggest that the manufacturing sector could be on the mend.

"Unfortunately, one data point does not make a trend. Whether this is merely a one-off or a more sustainable upward trend remains to be seen. It all boils down to global outlook, which unfortunately has remained uncertain. Our long-held view is that this year will be another difficult year for manufacturers."