October PMI points to stronger Q4 growth

[SINGAPORE] October's purchasing managers' index (PMI), the first key economic data release for the fourth quarter, has set the Singapore economy on track for a better, though not worry-free, finish to the year.

The latest PMI reading rose to 51.2 from 50.5 in September, the Singapore Institute of Purchasing and Materials Management (SIPMM) said yesterday, signalling a stronger-than-expected pick-up in manufacturing activity. The median estimate of seven forecasts collated by Bloomberg was 51. A reading above 50 denotes expansion while one under 50 points to contraction.

"The stronger PMI reading suggests that growth momentum could strengthen in Q4," said Bank of America Merrill Lynch economist Chua Hak Bin. With this, he expects the government to raise its full-year GDP growth forecast to between 3.5 and 4 per cent, from the current 2.5-3.5 per cent forecast.

Underpinned by further expansion in new orders, new export orders and higher output, October's stronger PMI also reinforces the surprise surge in September's factory output that the Economic Development Board reported two Fridays ago.

Electronics manufacturers, whose output surged 20 per cent in September, also reported higher activity levels in the latest PMI survey. The electronics PMI rose to 51 in October from 50.3 in September, SIPMM said. Sub-indices showed growth in both local and foreign new orders, as well as higher output.

"Overall inventory continued to contract for the third consecutive month, indicating that the new orders could be expected to beef up production and imports in the coming months," said Janice Ong, executive director of SIPMM, which compiles the monthly index from its poll of more than 150 industrial companies' purchasing managers.

The drop in inventories - the overall inventory sub-index fell to 48.9 while that for electronics sank to 46.4 - suggested that producers are either finally shipping them out, or writing excess inventory off, said Barclays economist Joey Chew. "In any case, it's good for manufacturing and exports to get rid of this inventory hangover," she said.

Globally, the latest PMIs for the US, Europe, China, Korea and Taiwan, which have all shown expansion in manufacturing, bode well for an export recovery too.

"Despite the dip in consumer sentiment in October from the US government shutdown and fiscal drama, it appears that producers and retailers are still gearing up for a strong Christmas shopping season," said Ms Chew.

If, however, Singapore's export performance continues to diverge from industrial production as it has in recent months, that may flag a loss of competitiveness. With inventories now correcting, the only explanation for a export-production gap would be that Singapore's producers have cut export prices and sacrificed profit margins to secure orders, Ms Chew said.

But SIPMM's Ms Ong reckons that lower input costs may have helped. "Factory output has been boosted by lower input prices, suggesting that our local manufacturers have been focusing on cost-reduction strategies to stimulate demands of their manufactured goods," she said.

Looking at the details of the PMI report, Mizuho Bank economist Vishnu Varathan said there was insufficient evidence in the data so far of significant manufacturing growth.

Though the appreciable uptick in employment sub-indices does set a "fairly upbeat tone for Q4", the smaller rise in new export orders shows uncertainty over whether the rebound in global demand will last. "The danger is being carried away with one round of rather effervescent data, whereas the underlying reality is more grounded," he noted.

After all, businesses themselves are less optimistic than before, said OCBC economist Selena Ling.

EDB's recent quarterly business expectations survey showed that more manufacturers expect the business outlook to deteriorate over the next six months than those who expect improvement. A quarter earlier, the number who were optimistic outnumbered the pessimistic.

In any case, Q4 will not be without its challenges. Mr Varathan believes export demand could be dampened if fiscal uncertainty in the US holds back business activity, or if the lagged effects of the stronger Singapore dollar cascade down to manufacturing.

Volatile external demand dynamics aside, ANZ economist Daniel Wilson said local producers will "continue to contend with increased cost pressures driven by rising rents and wages" through Q4 and into 2014.