[SINGAPORE] It may look like manufacturing activity strengthened in July, but the 3.3 per cent growth in factory output stemmed from a double-digit surge in biomedical production. Without this boost to offset contractions in the electronics and transport engineering clusters, industrial production would have fallen by 2.2 per cent last month.
As such, private-sector economists caution against getting carried away by the acceleration. Said Bank of America Merrill Lynch economist Chua Hak Bin: "July's performance was supported by a very volatile factor. If you take out the biomedical sector, you'll see (the expansion was) definitely not broad-based, so it's hard to say that this is really a big turning point. The story continues - restructuring and a stricter foreign worker policy is still weighing on manufacturing."
While the market consensus estimate seemed to hit the nail on the head - the median forecast of 23 economists polled by Bloomberg before the Singapore Economic Development Board (EDB) released the data on Tuesday was for a 3.3 per cent expansion - individual analysts had vastly different projections. Forecasts ranged from a contraction of 2 per cent, to an increase of 4.2 per cent.
Analysts think this had to do with differing opinions on whether the "wildcard" biomedical sector would surprise on the upside or on the downside.
Those who banked on the former were right; thanks to a strong showing from both the pharmaceuticals and medical technology segments - which rose 28 per cent and 30.8 per cent respectively - the biomedical manufacturing cluster's output increased 28.5 per cent in July.
"We are back on drugs again and that's good, because without (the upswing) we would have sunk," said CIMB economist Song Seng Wun, who estimates that the biomedical cluster alone contributed 5.1 percentage points to headline industrial production growth.
Excluding the volatile sector though, output would have fallen by 2.2 per cent.
The key electronics cluster - which retains the largest weight of 33.4 per cent on the industrial production index - continued to exert a drag on overall manufacturing activity.
Electronics output dropped 2.9 per cent in July, falling for the fourth straight month as flagged by EDB in April when it said a "one-off" and "firm-specific factor" will weigh down the semiconductors segment for the rest of the year. Semiconductors activity contracted by 1.6 per cent in July.
Still, the fall in electronics production was less than the 4.4 per cent and 4 per cent contractions seen in June and May respectively.
Declines in output were also recorded in the transport engineering (-9.9 per cent) and general manufacturing (-5.9 per cent) industries. The former suffered from lower contributions from rig building and ship repair jobs, leading to a 9 per cent drop in the marine & offshore engineering segment; the aerospace segment contracted 16.2 per cent, due to a lower volume of repair jobs from commercial airlines.
But it was not all bad news in July - the chemicals and precision engineering clusters expanded by 9.2 per cent and 4.4 per cent respectively.
EDB said that after adjusting for seasonal factors, industrial production increased 2.7 per cent month on month in July. Excluding biomedical manufacturing, output would have fallen by 0.8 per cent.
The expansion was larger than private-sector economists had earlier forecast - they had been expecting industrial production to increase by 2.3 per cent in July from June, on a seasonally adjusted basis.
Even though manufacturing output has grown 5.2 per cent year on year, economists believe things will slow in the second half of 2014.
UOB economists Francis Tan and Jimmy Koh said in a research note: "Going forward, manufacturing output growth in the second half of this year will see some headwinds. For a start, the high base effects in H2 2013 and the continued weakness in electronics output will weigh down overall manufacturing activity growth. Domestic supply-side constraints from the tight labour market will continue to drive up wages - thus exerting upward pressures on business costs."
And while ANZ economists Daniel Wilson and Glenn Maguire think that production would be buoyed by firmer demand in developed markets and China, they believe that gains would be capped by Singapore's tight labour market. They also do not expect July's jump in pharmaceuticals activity to last for long, given the lumpy nature of production cycles.