March output dive dashes hopes of manufacturing recovery

Singapore

A SHARP plunge in March factory output dashed hopes of a recovery for the lacklustre manufacturing sector, with the gloomy spell set to continue for the rest of the year as global business uncertainty remains.

Economists are seeing downside risks to their economic growth forecast for the year, with expectations mounting that the Ministry of Trade and Industry (MTI) will downgrade its official 2019 growth projection when the final first-quarter results are out in May.

Industrial production sank 4.8 per cent in March from a year ago, marking the first contraction since December 2017. This also came in below economist expectations of a 4.6 per cent decline.

This was a reversal from the 2.6 per cent expansion in February, which was revised up from an earlier estimate of 0.7 per cent.

With the volatile biomedical manufacturing cluster stripped out, factory output fell a steeper 8.7 per cent.

The dismal showing in March was mainly attributed to the heavyweight electronics cluster which saw a drop of 15.3 per cent - the steepest decline in about six years. The drag came mostly from its semiconductors, data storage, and computer peripherals segments, which all clocked double-digit declines.

Economists noted that this was in line with the sharp fall in Singapore's electronics exports in March amid the global semiconductor downturn.

A turnaround is not expected to take place any time soon. In the Monetary Authority of Singapore's macroeconomic review also released on Friday, the central bank cautioned that global chip sales still face "significant headwinds" in the next few quarters as spending on IT equipment dips on weaker sentiment.

Precision engineering was the next worst performer as it fell by 13.3 per cent, extending its decline for the fifth straight month. Chemicals saw a drop in output of 2.7 per cent, largely due to maintenance shutdowns in some plants.

On a brighter note, the biomedical manufacturing cluster showed it still has legs as output surged by 13.7 per cent in March, again buoyed by pharmaceuticals.

General manufacturing output increased 5.8 per cent on the back of higher production of infant milk and dairy products, while transport engineering inched up by 1.8 per cent, lifted mostly by the aerospace segment.

Despite the overall disappointing performance in March, economists are expecting a slight uptick in the final economic growth results for the first quarter. This comes as the 0.5 per cent decline in factory output for the three months was not quite as severe as the government's advance estimate of a 1.9 per cent drop.

But this is still not enough for economists to cheer as they expect the official full-year forecast to be downgraded as global demand continues to wane. The MTI's current base case is "slightly below" the midpoint of the 1.5-3.5 per cent growth range.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye project that the ministry will downgrade the 2019 economic growth forecast to 1.5-2.5 per cent. Their forecast for the year remains at 1.8 per cent.

Barclays economist Brian Tan said that there could be downside risks to his forecast of 2.4 per cent for the full year, if the weakness seen in March factory output turns out to be persistent rather than a "one-off".

He added: "As we do not expect the dark clouds looming over the economic growth outlook to clear this year, our base case is for the MAS to also stand pat in its October (monetary policy) meeting."

However, UOB economist Barnabas Gan expressed cautious optimism on the economic outlook, including manufacturing.

"While the Singapore economy is still seeing signs of negative output gap given the recent contraction in manufacturing growth and soft export growth prints, we remain positive that domestic economic growth pace and industrial production momentum will pick up into the second half of 2019," he said.