Economists unmoved by surprise boost in April factory output

Singapore

AN ongoing destocking process helped lift Singapore's manufacturing output in April to new levels.

But beyond the surprise, economists are still searching for signs to point towards sustained growth in the sector - and the economy in general.

"While April's (industrial production) data suggests a strong start to the second quarter of 2016, weakness in leading indicators provides ample reasons to be cautious," said Citi Research economist Kit Wei Zheng.

Estimates for April's industrial production, released by the Economic Development Board on Thursday, packed a punch.

Total output was up by 2.9 per cent from a year ago, far better than market expectation from a Bloomberg poll of a 0.2 per cent fall.

This print makes it the best performance in 20 months. Factories saw a 3.8 per cent increase in August 2014.

Month-on-month numbers did not disappoint, either. On a seasonally adjusted month-on-month basis, it increased 4.8 per cent from March, beyond the 1.6 per cent that Bloomberg polled.

This upturn seemed to have had its beginnings in late March, with figures for March being revised upwards. The headline number was previously a 0.5 per cent year-on-year drop, and was changed to 0.1 per cent growth in Thursday's release.

The data comes just one day after the release of full estimates of Q1 gross domestic product (GDP) by the Singapore government.

It is also one of the first sets of data that will give an early indication of how Q2 GDP would fare.

This is because industrial production numbers have a strong correlation to manufacturing GDP growth, which in turn affect overall GDP numbers, say economists. The sector shrank by a year-on-year 1 per cent in Q1, while it saw a heady quarter-on-quarter 23.3 per cent increase.

Some economists took heart from April's factory output data.

"The better-than-expected April numbers may point to green shoots for Singapore's manufacturers in the coming months," wrote UOB economist Francis Tan.

Economists linked the upturn to other recent sets of data.

Falling inventory levels in recent months would have resulted in higher output, they said.

This can be seen in the falling purchasing managers' indices for inventory in regional economies like South Korea and Taiwan, and in Singapore. It would indicate that factories are experiencing unexpected demand and therefore must run down their inventory.

Another set of data is the better performance of the industry made up by North America-based manufacturers of semiconductor equipment.

Its monthly book-to-bill ratio has remained above one since December last year. A ratio of above one implies that more orders were received than filled, indicating strong demand; a ratio below one implies the opposite.

This is thus reflected in Singapore's electronics output. The cluster, which accounts for slightly more than a quarter of the whole manufacturing sector, grew by 10.9 per cent year-on-year in April. Notably, within the cluster, semiconductors improved output by 24.2 per cent.

But while the better performance in April was cause for cheer, economists are refraining from celebrating.

One reason was that the improvement could be attributed to the low base effect from last year's data. Manufacturing has been mired in a long period of recession; its monthly output has been shrinking year-on-year for the whole of 2015, save for January.

"Now it's basically manufacturing trying to find a floor," said ANZ economist Ng Weiwen. "Coming from the low base, any improvement definitely can be cheered upon."

Economists also noted that the April uptick was not broad-based.

For example, chemicals and transport engineering both saw their output fall year-on-year in April, at 4.3 per cent and 12 per cent respectively.

Looking ahead, economists expressed concern at how weakening economic sentiment will curb appetite for manufacturing output. Already, the government on Wednesday dimmed its growth forecast for 2016, citing increasing challenges coming out from China, the United States and the Eurozone.

This will affect destocking activity, which was a cause for April's increased output.

Inventories will build up again and result in "a sharp pullback in production in subsequent quarters if demand does not recover," wrote Citi Research's Mr Kit.

This, in turn, affects GDP growth. Changes in inventories was a 5.1-percentage-point contribution to Q1 GDP growth, said the government.

Weakening sentiment will also curb appetite for investments, which will affect factory output, said economists.

"Oil-related investments will be severely affected by recent fluctuations, and also on potential rising interest rates, that should continue to be a drag on production." said Standard Chartered economist Jeff Ng.

"It's still too early to see a recovery," he added.