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Q4 and full-year GDP growth may be revised higher

Manufacturing in December shrinks less than expected, down 1.9% against consensus estimate of minus 3.4%

Singapore's fourth quarter and 2014 growth estimates for its gross domestic product (GDP) look set to be revised upwards, with the manufacturing sector having sprung a December surprise by contracting less than expected.
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SINGAPORE's fourth quarter and 2014 growth estimates for its gross domestic product (GDP) look set to be revised upwards, with the manufacturing sector having sprung a December surprise by contracting less than expected.

Industrial production fell 1.9 per cent year on year last month, with factory output declining across all clusters except precision engineering.

The drop was far less than the market had forecast: the 14 economists polled by Bloomberg before the Singapore Economic Development Board (EDB) released the numbers on Monday had been expecting factory output to fall by a larger 3.4 per cent, given December's weak Purchasing Managers' Index (PMI) reading of 49.6.

But coupled with November's revised output performance of a 2.1 per cent contraction - versus an earlier preliminary figure of minus 2.8 per cent - December's better-than-anticipated outcome bodes well for Q4's GDP, economists say.

At least six institutions - Bank of America Merrill Lynch, CIMB, Citi, HSBC, Nomura and UOB - predict that Q4 GDP growth will come in higher than the official forecast of 1.5 per cent; their projections range from 1.6 per cent to 2 per cent.

Citi's Kit Wei Zheng and UOB's Francis Tan now predict full-year GDP growth to be 2.9 per cent - a touch above the government's flash estimate of 2.8 per cent; HSBC's Joseph Incalcaterra said that even his 3 per cent forecast for the year is possible.

The Ministry of Trade and Industry (MTI) will release final growth figures by the end of February. As for December's manufacturing performance, excluding the volatile biomedical sector - which contracted one per cent last month on a 1.8 per cent decline in pharmaceuticals production - output would have fallen by a larger 2.1 per cent.

Production in the key electronics cluster slipped back into negative territory in December, with a 2.4 per cent fall in output. It retains the largest weight of 33.4 per cent on the industrial production index.

Barclays economists Leong Wai Ho and Bill Diviney noted that although pharmaceuticals and electronics recovered on a month-on-month seasonally adjusted basis, their year-on-year contributions were weighed down by a high year-ago base. In addition, the 10.9 per cent increase in output of the precision engineering cluster was not enough to offset declines in transport engineering (minus 6.8 per cent), chemicals (minus 2.7 per cent), and general manufacturing (minus 4 per cent).

HSBC's Mr Incalcaterra said: "Underneath the ominous headline of Singapore's second consecutive year-on-year industrial production decline, the December print shows some signs of increasing momentum. However, we caution against too much of an optimistic view, seeing that the manufacturing sector is likely to face some headwinds in the months ahead."

Aside from domestic labour market constraints and weak economic conditions in Japan and the eurozone, UOB's Mr Tan said, the decline in global oil prices could affect the marine & offshore engineering and chemicals segments in the coming months.

Still, Mr Incalcaterra stressed that the impact of weak oil prices on these industries is "anything but clear-cut". "As long as the refiners didn't build up too much expensive oil inventory, their refining margins should stay steady or improve."

EDB said that after adjusting for seasonal factors, industrial production grew 1.8 per cent month on month in December. Excluding biomedical manufacturing, output would have increased 1.5 per cent. The month-on-month expansion was also better than private-sector economists had forecast; they had expected factory output to rise by a smaller 1.5 per cent in December from November on a seasonally adjusted basis.

Overall, manufacturing output rose 2.6 per cent in 2014 from a year ago, with the biomedical manufacturing cluster the star performer with 8.8 per cent growth year on year.

Apart from electronics and general manufacturing, which grew output by 0.1 per cent and 1.7 per cent respectively, the remaining groups posted increases in 2014 from the year before (chemical engineering at 5.3 per cent, precision engineering at 3.8 per cent and transport engineering at 0.9 per cent).

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