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Singapore PMI contracts for first time this year

August drop dashes hopes of sustainable recovery in manufacturing

[SINGAPORE] Contrary to earlier expectations, a sustainable recovery in manufacturing is not underway yet.

Dropping below the key 50-point mark for the first time this year, Singapore's Purchasing Managers' Index (PMI) fell 1.8 points to 49.7 in August, dragged down by lower levels in new orders, inventory, and stockholdings of finished goods.

After seven consecutive months of expansion, August's swing to contraction mode marked the largest retreat since March 2011 and the lowest reading since last December.

Surprised and disappointed by the data, economists told The Business Times that "significant headwinds" still confront the manufacturing sector in the second half of 2014, even in the run-up to the seasonal peak Christmas period.

Said OCBC economist Selena Ling: "If you look across Asia, the only country with manufacturing PMI also sliding back into contraction territory in August is Indonesia. So this is a real knock to market confidence for Singapore's manufacturing outlook for the next 3-6 months."

Added Bank of America Merrill Lynch economist Chua Hak Bin: "These are ugly figures and they do not square with the view of a modest recovery in external demand. The plunge in the PMI to below 50 suggests a deeper manufacturing slump is a clear risk."

In contrast, the PMIs of Taiwan, India, Japan, South Korea and China were still in expansion territory, even as some of them dipped from July.

In Singapore, the 1.8-point drop in overall PMI - which Ms Ling described as "precipitous" - was more than the market had forecast. Private sector economists polled by Bloomberg had earlier projected a reading of 51 - down from July's surprise expansion of 51.5, which marked a one-year high.

"The readings recorded a first-time contraction in new export orders (down 1.9 points to 49.8) and production output (down 2.6 points to 49.6)," said the Singapore Institute of Purchasing & Materials Management (SIPMM). "Overall imports and employment reverted to contraction (49.2 and 48.6 respectively), while input prices (49.7) continued to contract for the third consecutive month."

SIPMM polls more than 150 industrial companies to compile the index each month. A reading above 50 denotes growth, while one under 50 points to a contraction in the manufacturing sector.

While the electronics PMI also fell in August, it continued to expand for the 19th consecutive month, dropping 1.7 points to 50.7.

The easing was due to slower growth in new orders from both domestic and overseas markets (which were down 2.1 points and 2.2 points to 51.4 and 50.5 respectively), and a drop in electronics production output (down 2.7 points to 50.9).

UOB economist Francis Tan joins Ms Ling and Dr Chua in thinking that "there may be more headwinds in store for the manufacturing sector", although he qualified that the up-and-down nature of the PMI makes it hard to tell whether August's contraction will last.

Still, not all economists viewed August's PMI readings with a heavy sense of foreboding. CIMB's Song Seng Wun thinks that things should pick up with year-end festive demand around the corner, while DBS's Irvin Seah believes a sustained contraction is unlikely.

Said Mr Seah: "Of course, I was surprised that the PMI actually dipped into contraction mode. But the (downward) direction was in line with what I was expecting. And if you average out August and July's readings, it would be around the 50.6 mark - that's still above 50 and range-bound.

"I think the volatility (seen in the last two months) reflects short-term industry cycles. If you cast these aside, what you get is a flattish trajectory in manufacturing," added Mr Seah, who expects the sector to run sideways in the months ahead, with the PMI staying just slightly above 50.