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Singapore's September PMI falls for third month in a row

Economists see high chance of technical recession in third quarter; but North American data suggests bottoming out for electronics industry

Singapore's manufacturing sector contracted again in September, as the Purchasing Managers' Index (PMI) continued its downward slide for the third month, disappointing with a reading of 48.6.


SINGAPORE'S manufacturing sector contracted again in September, as the Purchasing Managers' Index (PMI) continued its downward slide for the third month, disappointing with a reading of 48.6.

This was lower than the 49.3 recorded in August and the 49.7 score in July.

Factors cited for the drag by the Singapore Institute of Purchasing and Materials Management (SIPMM) included declines in new orders, new export orders and production output. Meanwhile, inventory and stockholdings of finished goods continued to expand.

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A PMI reading above 50 indicates that the manufacturing economy is expanding and a reading below 50, declining.

While the contraction in September didn't come as a major surprise, it was deeper than some private-sector economists had projected. "It's lower than what we expected by one point," said Barclays economist Leong Wai Ho, pointing to a huge inventory overhang in North Asia for electronics as a contributing factor for the decline.

The electronics index dipped 0.5 point over the previous month to 48.5 in September, in contraction territory for the third consecutive month. Electronics is a key pillar of Singapore's manufacturing sector.

"Singapore probably is facing a double whammy from lacklustre external demand and domestic constraints from higher costs and tight manpower supply," said Selena Ling, head of treasury research & strategy at OCBC Bank, noting that this was the poorest print since Dec 2012.

Across the region, the picture was a mixed one. While PMIs for China and other markets such as South Korea, Taiwan and Malaysia also contracted, there was some stabilisation, if not modest improvements, noted Ms Ling. On the other hand, Indonesia, India and Vietnam - like Singapore - reported weaker figures for September vis-a-vis August.

Aside from the external slowdown, UOB economist Francis Tan pointed out that Singapore's manufacturing sector is also being hit by the stronger Singapore dollar compared to some regional currencies, which is eroding competitiveness. As such, at the Monetary Authority of Singapore's (MAS) next policy review this month, Mr Tan expects the MAS to ease the midpoint of the Singapore dollar nominal effective exchange rate (S$NEER) downwards by one per cent to level the playing field against certain economies. These include Taiwan, South Korea and Japan. However, he doesn't expect MAS to shift to a neutral policy stance.

But it isn't all gloom-and-doom. One bright spot is that the improvement in the North American semiconductor book-to-bill ratio could suggest a bottoming out for the electronics industry, added Ms Ling, highlighting the ratio clocked 1.06 in August from a year-to-date low of 0.98 in June. The ratio is a key gauge of shipments and orders of North American semiconductor makers.

Ms Ling went on to say: "In addition, the base effects for domestic industrial production for the September-December should be turning more favourable. As such, we still expect manufacturing growth to contract a less severe 1.7 per cent year on year in 4Q15, versus an anticipated 4.9 per cent year on year decline in 3Q15."

Economists also said that the chances of a technical recession - defined as two straight quarters of consecutive decline - for 3Q15 are pretty high.

"Barring an unexpected jump in industrial production, we expect manufacturing activity to contract more deeply in Q3," said Vishnu Varathan, senior economist at Mizuho Bank. He added that a technical recession was likely on the cards, unless the service sectors could surprise with a "disproportionately" large offset.

But Barclays' Mr Leong warned against hitting the panic button.

While a "mild" technical recession is likely, he does not expect job losses, given it is more a result of a slowdown in the region, which is having a knock-on effect on Singapore's economy.

READ MORE: China's manufacturing sector shrinks further in Sept