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July PMI uptick raises hopes for a better H2

Economists are surprised by better-than-expected figures but have misgivings about actual outcomes

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An early indicator of manufacturing performance has sparked hopes for a better second half - albeit with caveats - after a gloomy second quarter. Buoyed by an increase in new orders and higher production and inventory levels, Singapore's latest Purchasing Managers' Index (PMI) surpassed expectations, rising 1.0 to 51.5 in July and marking a one-year high- PHOTO: BLOOMBERG

[SINGAPORE] An early indicator of manufacturing performance has sparked hopes for a better second half - albeit with caveats - after a gloomy second quarter. Buoyed by an increase in new orders and higher production and inventory levels, Singapore's latest Purchasing Managers' Index (PMI) surpassed expectations, rising 1.0 to 51.5 in July and marking a one-year high.

The better-than-anticipated reading caught private-sector economists by surprise; the seven polled by Bloomberg had earlier forecast a reading of 50.7.

A reading above 50 denotes growth, while one under 50 points to a contraction in the manufacturing sector.

Said CIMB economist Song Seng Wun: "Given the overall downward trend that we've seen in industrial production and export numbers, there was this expectation that we'd get another uninspiring set of PMI readings. But July's numbers seem to imply that manufacturers are looking a lot busier than we thought they would be - so the numbers are really a bit surprising, and supportive of a second half recovery."

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The electronics sector continued to expand in July, with its PMI rising 1.7 to 52.4 - significantly above the market's forecast of 50.9.

Much of the boost came from new orders from both domestic and overseas markets; production output and inventory posted higher readings as well.

Referring to the 1.7 increase as "quite a strong uptick", UOB economist Francis Tan said: "New orders were up 2.0 and the production index rose 2.6 - so at least on the production side, this seems to be painting quite a bright picture for a couple of months ahead."

The index - seen as a barometer of manufacturing activity - is compiled by the Singapore Institute of Purchasing & Materials Management, which polls more than 150 industrial companies each month.

Apart from Mr Song and Mr Tan, economists from Bank of America Merrill Lynch (BOAML) and OCBC also say they now have a more favourable outlook for the second half of this year. Apart from July's PMI performance, they also cite improving global economic conditions, which should provide some uplift here.

But even as economists were cheered by the latest PMI figure, many were quick to qualify that actual outcomes may not be so sanguine, since there is no direct correlation between PMI and economic performance.

Said BOAML economist Chua Hak Bin: "July's PMI looked good, and we're hopeful this means there is a turning point - that these numbers will translate into better industrial production and exports performance. But we've seen some false starts before.

"If we had gone with the first six months of this year where PMI held up fairly well, things should have been alright in the manufacturing sector - but that's not what we've seen in the figures recently. In fact, exports and industrial production have shown broad-based contractions."

As such, while Dr Chua thinks the latest PMI numbers are "encouraging", he is unsure how much of this will actually translate into a better manufacturing and exports performance.

DBS economist Irvin Seah added that "an overhanging structural drag" still exists, and this would adversely affect the manufacturing sector (a pick-up in the global economy notwithstanding).

Mr Song and Mr Tan also have their misgivings. Said the former: "The PMI is not weighted, so certain groups of companies polled could swing the numbers around, if they are much more optimistic than the norm."

UOB's Mr Tan also noted how seasonal effects could be at play: "Historically, June, July, and August are the strongest months of the whole year (in terms of manufacturing activity), since factories are rushing to fulfil end-of-year orders. So that could water down any optimism about July's reading."

Singapore's last month's PMI performance was largely in keeping with the rest of the region, which showed firmer readings for new orders and output. The pick-up was especially strong in Taiwan (a rise of 1.8 to 55.8) and India (a rise of 1.5 to 53).

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