January output shrinks for first time in a year

Singapore

SINGAPORE'S manufacturing sector started the year on shaky footing, with factory output contracting for the first time since December 2017.

Economists said that the underwhelming start - while expected - does not bode well for the rest of the year as manufacturing weakness is likely to continue, with some cutting their growth outlook for 2019 on the back of recent disappointing data including non-oil domestic exports.

Industrial production (IP) declined 3.1 per cent in January from a year ago, compared to a revised growth of 1.7 per cent in December 2018, according to data from the Singapore Economic Development Board.

This is exactly on target with economist projections, with pundits blaming a combination of factors such as high base effects, the fading electronics cycle, slowing Chinese demand, and uncertainties from the trade war for last month's figures.

Barclays economist Brian Tan explained that the contraction in January was mostly due to the unfavourable base effect from a strong output in the same period last year, which saw growth of 18.4 per cent.

"That base effect reverses in February so that should support the next IP print," he said.

UOB economist Barnabas Gan said that the contraction was "not surprising" as it was in line with the rest of the region. This comes as the "relatively weaker" external environment seen in Asia is likely to have discouraged manufacturing activities given the outward-oriented nature of the regional economies, he said.

In January, the two clusters that pulled down factory output were electronics and precision engineering - previously the key growth drivers of the economy. Electronics output fell 13.7 per cent, with almost all segments registering a lower level of production except the other electronic modules & components.

Precision engineering decreased 15.7 per cent, on the back of lower production of semiconductor equipment.

Some bright spots were seen in the other clusters, but they were still not enough to make up for the drag.

In particular, transport engineering continued to outperform, with an increase in output of 20.2 per cent. All segments recorded growth, with the marine & offshore engineering segment up 26.9 per cent, and the aerospace segment up 17.4 per cent.

Biomedical manufacturing grew 10 per cent on the back of pharmaceuticals, while chemicals rose 2 per cent, due to higher production of fragrances.

General manufacturing climbed 3.2 per cent, thanks to higher production of batteries and structural metal products, and an increase in the food, beverages & tobacco segment on the back of festive demand.

Economists, however, are not convinced the positive performance in some sectors is likely to last.

Dr Tan Khay Boon, senior lecturer, SIM Global Education, noted: "If oil prices were to decrease further, the expansion in the marine & offshore engineering segment may be short-lived. In addition, the volatility in the pharmaceuticals output also means that the biomedical manufacturing performance may not sustain."

Barclays' Mr Tan said that he is cautious on the outlook of manufacturing and "wouldn't be surprised" if the contraction persists. While there is progress in negotiations between China and the US on trade, he believes that it will not reverse previous tariff hikes.

He had earlier reduced the 2019 growth forecast to 2.4 per cent from 2.7 per cent, after the Ministry of Trade and Industry lowered projections to "slightly below" the midpoint of its forecast range of 1.5-3.5 per cent.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye on Tuesday cut their 2019 economic growth forecast to 1.8 per cent from 2.2 per cent previously.

They are penciling a manufacturing downturn in the first half of 2019, including a negative first quarter.

A protracted manufacturing recession and a further growth downgrade cannot be ruled out if no trade deal is reached, they said, adding that trade-related services, such as wholesale trade and transport & storage, will likely mirror the manufacturing slump.

On the other hand, OCBC economist Selena Ling is sticking to her growth forecast of 2.7 per cent, as the first two months of the year is usually volatile due to the Chinese New Year.

But like the other economists, she warned that regional manufacturing and trade activities "may remain lacklustre" in the coming months, barring a quick resolution to the US-China trade war.