Quick take: More headwinds for Singapore manufacturing signal lower 2015 growth: UOB

UOB economists are expecting more headwinds for Singapore's manufacturing sector.

Earlier on Thursday, the Economic Development Board (EDB) said industrial production (IP) fell 3.6 per cent year-on-year in February. This was worse than the consensus estimate of a 2.2 per cent year-on-year contraction. Excluding biomedical manufacturing, output fell 3.9 per cent from a year ago.

On a seasonally adjusted month-on-month basis, manufacturing output increased 4.1 per cent in February 2015, compared to January 2015. Excluding biomedical manufacturing, output grew 1.1 per cent.

"Due to the Chinese New Year falling in February this year, compared to January in 2014, most clusters contracted on a year-on-year basis as having fewer working days in February this year meant that production values could not keep up the same pace. Only the general manufacturing cluster experienced a 1.3 per cent year on year increase due to the growth in the food, beverages & tobacco segment from higher festive demand,'' said UOB economists Francis Tan and Jimmy Koh.

Taking away the Chinese New Year effect, they said Singapore's IP has started off on a weaker-than expected footing as it fell by a cumulative 1.1 per cent year-on-year in the January-February period.

"Over the next few months, we expect several headwinds to manufacturing activities,'' they said.

Weak economic conditions in both the Eurozone and Japan will continue to weigh on Singapore's manufacturing exports to these countries. This was already evident in Singapore's non-oil domestic exports (NODX), which fell 2.4 per cent year-on-year basis in the January-February period. Currency weakness in these two regions will also reduce Singapore's export competitiveness in the global market.

The still-low global oil prices could continue to impact the marine & offshore engineering and petrochemicals segments. Lastly, the tight labour market continues to plague manufacturers as they work around this issue while trying to improve labour productivity so as to reduce labour intensity, they said.

"In the near term, cyclical weakness in Singapore's largest GDP contributor by industry will likely prompt the authorities to adopt easier monetary stance," the UOB economists said.

"We think that the weakness, coupled with the SGD NEER trading quite close to the -2 per cent band recently, will see the MAS adopting a downward recentering of the SGD NEER midpoint by around 2 per cent in their April decision. We continue to see the USD/SGD trending higher to the 1.44 mark by end-2015.''

UOB has revised its 2015 IP growth forecast to 1.3 per cent, from 3.5 per cent earlier. It has also lowered its 2015 GDP growth forecast to 2.9 per cent, from 3.3 per cent earlier.