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Worst manufacturing decline in 14 years prompts growth revisions

Some economists are revising down Q4 2015 and full-year forecasts, but others say the slump in manufacturing's output will have a muted impact

Figures from EDB indicate that factory production last year was 5.2 per cent lower than in 2014, making it the biggest contraction since the dot-com crash, when manufacturing output fell by 11.6 per cent in 2001.


THE contraction in Singapore's manufacturing output last year - the deepest in more than a decade - is forcing economists to relook at economic growth figures for 2015.

Kit Wei Zheng of Citigroup, for example, said: "Factoring in downward revisions in services, given the slowdown in trade-related activities and financial services, we think gross domestic product (GDP) growth in the fourth quarter of 2015 could be revised down to 1.4 per cent year-on-year ... bringing full year 2015 growth to 2 per cent."

Advance estimates previously released by the Ministry of Trade and Industry (MTI), based on data collected last October and November, had pegged Singapore's economy to expand 2.0 per cent year on year in the fourth quarter of 2015, and to grow by 2.1 per cent for the whole year.

Data released by the Economic Development Board (EDB) on Tuesday, on the other hand, gave economists fresh input to chew on.

Factory production last year was 5.2 per cent lower than in 2014, making it the biggest contraction since the dot-com crash, when manufacturing output fell by 11.6 per cent in 2001.

The slump was also the first time since the Great Financial Crisis that manufacturing output had decreased from the previous year. Output last decreased in 2009, by 4.2 per cent.

December's monthly print represented a year-on-year fall of 7.9 per cent. This was also the 11th consecutive month of year-on-year contractions in manufacturing.

These superlatives sent economists back to the drawing board on Tuesday.

CIMB Private Bank economist Song Seng Wun said: "All else constant, these figures alone would see headline GDP being bumped down to 1.8 per cent for the fourth quarter of 2015. I haven't even factored in the numbers on the services side."

He also recalculated 2015's full-year growth from 2.1 per cent down to 2 per cent.

But though Tuesday's figures put 2015's manufacturing output at its worst showing in over a decade, he said he thinks the sectoral recession last year was of a different nature from that during the Great Financial Crisis and the dot-com crash:

"Last year's slump was due to excess supply and over-capacity. Money was cheap, and businesses manufactured in anticipation of much stronger demand, and demand is still there," said Mr Song.

UOB economist Francis Tan also thinks that manufacturing's output slump in 2015 is not enough to be a precursor of a wider recession, when it is viewed in the context of stable employment figures and a robust services industry.

In addition, the impact of the contraction in itself would be muted.

MTI's estimates said that manufacturing GDP shrank by 6 per cent year-on-year in the fourth quarter of last year. EDB's data revealed that the sector's output decreased by 6.7 per cent in that quarter.

For a sector that has a GDP share of less than 20 per cent, the steeper decline indicated by EDB's data would ultimately have a negligible drag on total growth, said DBS economist Irvin Seah.

But he had a caveat to his calculations:

"No one knows for sure the spillover effects of inter-industry linkages in the economy," he said.

For example, the marine and offshore engineering segment's output represents only about 10 per cent of manufacturing's total output. But the segment shrank by a staggering 40.3 per cent year-on-year last December.

Its vertiginous drop in output took the wind out of the larger transport engineering cluster's sails, forcing it to shrink at 26.4 per cent year-on-year in December.

This might have implications for the oil-and-gas industry in Singapore, which in turn might make its effects felt in the wider economy, said Mr Seah.

Already, the malaise in most clusters of the manufacturing sector in 2015 made it the worst-performing year in over a decade.

Only the chemicals cluster recorded output growth in 2015, at 3.9 per cent. The transport engineering cluster shrank the most, at 13.5 per cent.

But UOB's Mr Tan was sanguine about prospects for manufacturing in 2016, as last year's slump presented opportunities for restructuring within the sector.

He forecasts a 2.5 per cent growth, partially due to the lower base from 2015's sectoral decline.

"We cannot throw away this engine," he said, referring to the sector as a driver for GDP growth. "What we need to do now is to find out how to refine this engine."

MTI will release full GDP estimates for the fourth quarter and the whole of 2015 next month.