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Quick Takes: Manufacturing recovery intact, but challenging outlook remains

SINGAPORE'S industrial production fell 2.3 per cent in May on a year-on-year basis - yet another month of contraction, although this marked a recovery from April's sharp 9.1 per cent decline.

The output contracted in all clusters except chemicals.

Here's what economists have to say about the manufacturing output data released by the Economic Development Board (EDB) on Friday.

Barclays' Leong Wai Ho and Bill Diviney on the varying performance of different clusters: "As we had expected, the main driver was a rebound in the volatile pharmaceuticals category following April's sharp drop; this offset weakness in chemicals and only a modest recovery in electronics. Indeed, the recent industrial production outturns mirror the pattern seen in exports, which has seen a structural emergence of non-electronics as the new key export and manufacturing growth drivers for Singapore - rig-building, pharmaceuticals, aerospace and engineering - with the importance of the electronics sector waning.

"With that said, we still expect the electronics sector to benefit from a cyclical rebound, with a recovering Europe augmenting already strong demand from the US, and this should provide further support to manufacturing in the second half."

UOB economists Francis Tan and Jimmy Koh say there is a high risk that Singapore may see a third consecutive quarter of year-on-year contraction in the manufacturing sector: "At 19 per cent share of Singapore's GDP, slower growth prospects in manufacturing will weigh on full-year GDP growth outlook. Economic uncertainties plaguing the Eurozone, US and China - our top exporting destinations - remain and will continue to drag on the confidence of manufacturers and exporters. In addition, Singapore's still-tight domestic labour market remains a constraint for production.

"We maintain our 2015 forecast for industrial production to grow 1.3 per cent this year, but the risk of a downgrade in our forecast is high during our next review in July."

While DBS economist Irvin Seah noted that there are some "glimmers of hope", he cautioned that 2015 will be a trying year for manufacturers: "Manufacturing PMI (purchasing managers' index) is finally back in expansion mode for May. The headline number has risen 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."