S'pore manufacturing springs to life, hope blooms for GDP growth

Singapore

SPRING is coming.

This analogy couldn't come at a more appropriate time for Singapore's manufacturing sector - and the larger economy - as the city-state prepares to wind down for the Spring Festival starting on Friday.

Though uncertainties still loom on the sector's horizon, December's factory output data released on Thursday surprised economists like never before in recent years.

The print comes at a time when Singapore is expected to grapple with the slowest year since the 2009 financial crisis.

The government's flash estimate put 2016's full-year gross domestic product (GDP) growth at 1.8 per cent.

Fuller estimates will be out next month.

After seeing Thursday's data, many economists are now revising GDP figures for 2016 upwards.

DBS economist Irvin Seah wrote: "Greater US trade protectionism could be a concern for the manufacturing sector in the longer term."

"But apart from that, the outlook for the sector ... is certainly turning brighter. Spring has finally arrived for the manufacturing sector."

Industrial production surged 21.3 per cent year-on-year in December, data from the Economic Development Board showed on Thursday. This is a five-year high, and also the fifth straight month of year-on-year expansion.

This leap blew market expectations out of the water. A Reuters poll forecasted 9.5 per cent; Bloomberg expected 10.4 per cent.

On a month-on-month basis, output expanded 6.4 per cent from an already strong 6 per cent in November.

Overall, the sector's output grew 3.6 per cent in 2016 over 2015.

Among the economists revising their predictions for Singapore's GDP growth, a number of them - including Citi, Nomura and Maybank Kim Eng - say that 2016's full-year growth will come in at 2 per cent.

Some have even taken it a step farther to lift forecasts for 2017. Citi economist Kit Wei Zheng wrote in a Thursday note: "This year's GDP growth could exceed 2 per cent, versus our current forecast of 1.5 per cent."

What also surprised was how broad-based the expansion was. Excluding the volatile biomedical sector, output still rose by 16.1 per cent. All but one cluster recorded growth in output.

The star performer was the electronics cluster, which accounts for over a quarter of output. It produced 49.4 per cent more in December than a year ago; this was due to semiconductor output almost doubling, clocking a 94 per cent expansion.

Biomedical production also surged ahead with a 44.9 per cent expansion, led by growth in pharmaceuticals.

Transport engineering was the only cluster to register a fall in output, at 17.8 per cent, dragged down by marine and offshore engineering.

With December's broad-based expansion, economists are now saying that manufacturing - once the worst-performing sector - is now on a sustainable path to expansion.

This observation is further bolstered by the recent rebound in Singapore's purchasing managers' index (PMI) for the sector.

After seeing conditions worsen for more than a year, the sector's PMI - seen as a leading indicator of output - finally registered expansion in the last four months.

PMIs in other economies are also trending up. This bodes well for producers here as they are intertwined with regional production chains.

ANZ economist Ng Wei Wen said: "Given the slew of strong PMI readings globally, the inventory cycle has likely turned strongly positive, providing an important boost to global production as reflected in today's strong IP print."

An increase in non-oil domestic exports is also painting a rosier picture for manufacturing.

Though worried about how Singapore's manufacturers may be losing out to others in global trade, economists said that Thursday's data showed that there is still some fight left in the city-state's manufacturing sector.

Dr Chua Hak Bin from Maybank Kim Eng wrote: "A synchronised global recovery appears to be underway. Singapore, being a small, open economy, is experiencing a strong cyclical uplift. Manufacturing and trade-related services are showing visible signs of acceleration."

But beyond the rise in external demand, some are also wondering whether December's strong print could point to a rise in productivity - that holy grail that policymakers and companies here have seemed unable to find.

Noting that output levels here have been rising over 2016, JP Morgan economist Benjamin Shatil wrote: "We suspect recent strength reflects an increase in production capacity specific to Singapore."

But though the manufacturing winter may be gone, some point out that spring is still in its ascendency.

Douglas Foo, president of Singapore Manufacturing Federation, said: "Data like this one is very, very good, but we still need to automate and digitise to be more competitive. Geopolitical issues are also threatening our exports."

"Manufacturers have to brace themselves in new landscape."