March non-oil exports weaker than expected

Singapore

NON-OIL domestic exports (NODX) for March were weaker than expected, but it doesn't necessarily mean the official estimate for the first quarter's economic growth will be adjusted down further.

Last month's NODX fell 6.6 per cent from a year ago, against the market forecast of a 0.5 per cent growth. "This was quite a big miss, even by Singapore's standards," says Michael Wan, an economist at Credit Suisse.

Pulled down by a dip in non-electronics shipments (-2.4 per cent) and bigger drop in electronics exports (-16.1 versus -3.7 per cent in February), the slump in the NODX was large enough to wipe out the gains from a 8.9 per cent rise - revised down from 9.1 per cent - in February to produce a quarterly dip of 1.0 per cent for January-March.

Month-on-month, the NODX fell by a seasonally adjusted 8.9 per cent in March, the biggest sequential decline since August 2012, Alvin Liew of UOB observes. And this came after the NODX rose by a revised 7 per cent (from 7.2 per cent) in February and against market projection of a 3 per cent dip. The latest trade figures were released yesterday by trade promotion agency International Enterprise Singapore, three days after the Ministry of Trade and Industry (MTI) issued the first-quarter's "flash" gross domestic product (GDP) growth estimates, which fell short of expectations.

The economy barely grew - up only a seasonally adjusted 0.1 per cent - in the first three months (Q1) of the year from the previous quarter, according to the preliminary estimates. From a year ago, it expanded 5.1 per cent, slowing from 5.5 per cent in the final quarter of 2013.

While these estimates were based largely on January and February growth data, economists say MTI could still have factored in March's NODX. So it's unlikely they will be revised down just on account of the latest NODX.

On the contrary, Bank of America Merrill Lynch's Chua Hak Bin still thinks MTI is likely to upgrade its 2014 GDP forecast to 2.5-4.5 per cent (from 2-4 per cent) when the final Q1 GDP appears in May.

Citigroup's Kit Wei Zheng, ANZ's Daniel Wilson and Glenn Maguire and Credit Suisse's Mr Wan see a possible downward adjustment, but Mr Kit and Mr Wan think it will be due to anticipated poor industrial production numbers in March, which are expected to be released next Friday.

The NODX may be a key indicator, but economists say it may not give the whole picture of external demand.

Noting the continued big divergence between NODX and factory output, Mr Wan and BAML's Mr Chua agreed with MTI that the electronics NODX could have been deflated because activities which previously would have been counted as electronics shipments, such as some electronics design and research, are now captured in industrial production and reflected in services exports. "As such, external demand might not be as weak as the headline merchandise export number suggest," Mr Wan says.

Barclays' Leong Wai Ho and Bill Diviney say that more electronics have been classified under re-exports (NORX) since last year. The NORX marked a year of uninterrupted strong growth with an 18.7 per cent increase in March, extending a 15.5 per cent gain in February.

This provides a "cushion" to overall export growth, said Mr Chua. Mr Wan noted that re-export activity has "quite a good historical relationship with the wholesale and retail trade component of GDP".

According to Citigroup's Mr Kit, NORX's strong showing suggests the wholesale trade sector continues to benefit from improvement in regional trade. Song Seng Wun of CIMB points out that while the NODX fell in Q1 (-1.0 per cent), it was a smaller drop than in Q4/2013 (-2.1 per cent) and Q1/2013 (-12.5 per cent). This points to the NODX picking up ahead.

Economists generally think it will happen in the later half of the year, when markets in the US, Europe and Japan continue to recover. But the upwing in these markets must be stronger to pull Singapore along and that's likely to take longer than before, according to them. Except for China and Malaysia, NODX shipments to all 10 major markets fell last month.