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Manufacturing traces choppy course, despite PMI uptick

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[SINGAPORE] Singapore's manufacturing continued on its choppy course in September - a sign that the long-awaited recovery is still patchy at best.

While the overall Purchasing Managers Index (PMI) bounced back to expansion mode last month - rising 0.8 points to 50.5, after slumping unexpectedly to 49.7 in August - economists told The Business Times that they are taking the uptick with a pinch of salt.

Said Bank of America Merrill Lynch economist Chua Hak Bin: "We're not really putting too much weight on the upturn, so we're still sticking to our view of a sluggish manufacturing recovery. The PMI has been a poor leading indicator of late - improvements have not been reflected in actual exports and industrial production numbers."

A PMI reading above 50 denotes growth, while one under 50 points to a contraction in the manufacturing sector. August's under-50 reading had marked the first contraction since Dec 2013.

After August's disappointing showing, private-sector economists were not expecting much in September - the five polled by Bloomberg had earlier forecast a reading of 49.9.

Last month's higher PMI reading of 50.5 was due to a further expansion in new orders (up 1.4 to 51.8), and the fact that new export orders (up 0.9 to 50.7), production output (up 1.5 to 51.1), and imports (up 1.2 to 50.4) all reverted to expansion in September.

But contraction readings were recorded in overall inventory (49.4), input prices (49.6), and employment (48.8).

Further expansion was seen in the electronics sector in September - the electronics PMI rose last month by 1.2 points to 51.9.

Said DBS economist Irvin Seah: "It's encouraging to see the electronics sector bouncing up to 51.9, despite all the structural concerns it faces. Having said that, I think this uptick (in electronics PMI) may not be sustainable, because the ramp up in production was probably due to year-end festive demand, which is seasonal."

The higher electronics PMI reading - its 20th consecutive month of expansion - was buoyed by growth in new orders from both domestic and overseas markets (both up 0.9 to 52.3 and 51.4 respectively); production output (up 2.7 to 53.6) and inventory (up 1.3 to 51.8) recorded higher readings as well.

"Stockholdings of finished goods (49.5) and input prices (48.6) reverted to contraction while imports (53.2) expanded for the first time. Electronics employment (50.0) moderated after having contracted in the previous month," said the Singapore Institute of Purchasing & Materials Management (SIPMM).

SIPMM polls more than 150 industrial companies to compile the index each month.

The up again, down again nature of recent PMI readings - not just in Singapore, but in the region as well - have slowly chipped away at earlier hopes of a sustainable recovery in manufacturing in the second half of this year.

Said CIMB economist Song Seng Wun: "The bottom line remains unchanged - the regional manufacturing recovery remains intact, but the seesawing PMI readings are a reminder that a strong and sustainable manufacturing pick-up is still some way away."

Added Mr Seah: "The outlook of the manufacturing sector remains tepid, and I think it will just continue to muddle along sideways. Even if we do see a cyclical pick-up in demand, I doubt we'll be able to benefit much because of overhanging restructuring constraints."

Still, economists don't expect a doomsday scenario either. Said Mizuho economist Vishnu Varathan: "The bigger picture perhaps is that global demand recovery may be a tad patchy and bumpy but not so dire that it is thrown into reverse gear... On balance we expect (a) broadening recovery in demand and thus a more durable pick-up in PMIs and manufacturing; albeit a gradual improvement rather than a V-shaped one."

Indeed, OCBC's Selena Ling remains "a tad more upbeat but cautiously so" for H2 2014 manufacturing growth prospects.

Forecasting full-year manufacturing growth at 4 per cent year-on-year, Ms Ling noted that manufacturers could be "turning more confident about the outlook and starting to invest in more capex", given the increase in borrowings in the sector.

According to data released by the Monetary Authority of Singapore (MAS) on Tuesday, manufacturing loans growth returned to positive territory in August, expanding 2.4 per cent year-on-year after remaining in contraction mode since March.