SINGAPORE'S manufacturing output surprised by shrinking 3.6 per cent year on year in July - reversing four consecutive months of expansion, and disappointing the market's hopes for a 0.8 per cent increase.
The weak showing was due to broad-based contractions in all clusters save electronics, and prompted at least one bank (UOB) to more than halve its full-year industrial production growth forecast to one per cent.
July's dismal figure - the second sub-zero reading this year, after February - also prompted private-sector economists to warn of downside risks to Q3 GDP (gross domestic product) growth.
Prior to the Economic Development Board's (EDB) data release on Friday, none of the 19 analysts polled by Bloomberg had foreseen such a feeble performance. Their median forecast was for a 0.8 per cent year-on-year expansion; only seven analysts had expected a contractionary reading, with even the lowest estimate pencilling in a milder 1.5 per cent decline (Credit Suisse's Michael Wan).
Explaining what he believes the market may have missed, HSBC economist Joseph Incalcaterra told The Business Times: "The market may have underestimated the decline in output from the marine engineering sector and its impact on a vast array of ancillary industries."
Excluding the volatile biomedical manufacturing sector - whose output shrank 9.7 per cent year on year in July - overall industrial production would still have contracted, albeit by a smaller 2 per cent.
In seasonally adjusted month-on-month terms, manufacturing output declined 4 per cent in July - the third straight month of contraction. This was also a far worse showing than private-sector economists had forecast; they had foreseen an expansion of 0.3 per cent.
The worst-performing cluster was transport engineering, which posted a 21.8 per cent decline in output year on year.
Said the EDB: "This was largely attributed to the marine & offshore engineering segment (which contracted 33.4 per cent), in which rig-building activities and demand for oilfield & gasfield equipment remained weak amidst the low oil price environment. The aerospace and land transport segments declined 2.3 per cent and 2.6 per cent respectively."
Production in other clusters such as precision engineering, general manufacturing, and chemicals also dropped, by 4.9 per cent, 10.2 per cent, and 3.2 per cent respectively.
The only cluster to post an expansion in output was electronics, whose production increased 16.2 per cent in July thanks to a 34 per cent jump in semiconductors. July 2015 also provided a low base for comparison.
Still, the heavyweight sector - electronics takes up the largest share (27.4 per cent) of total manufacturing activities - was not enough to offset the broad-based declines seen in all other clusters in July.
While UOB economist Francis Tan remains hopeful for further boosts from the electronics cluster, he noted that weak export conditions and the depressed transport engineering cluster will continue to mar overall prospects in the manufacturing sector.
Economists from DBS and Citi also flagged the rising risk of a technical recession (two successive quarters of negative sequential growth), should manufacturing output continue to disappoint.
Said Citi economist Kit Wei Zheng: "In the event that official GDP expectations are undershot, it will be critical to judge whether the miss is sufficiently large to constitute a 'marked deterioration' which is a necessary precondition for further MAS (Monetary Authority of Singapore) easing.
"For now, we place a 35 per cent probability of a 'slight' downward recentring in October, despite the slight upgrade in MAS's inflation forecast trajectory a month ago. We look to detailed job numbers in mid-September to assess the likelihood of a policy response, including on the fiscal front."