Singapore factory output falls 4.2% in March; economists expect slump to continue through H1

SINGAPORE’S manufacturing output contracted less than expected in March, but economists expect the industry’s slump to continue for at least the first half of 2023.

Industrial production fell 4.2 per cent year on year in March, marking the sixth straight month of contraction, according to data from the Singapore Economic Development Board on Wednesday (Apr 26).

This was an improvement from February’s revised figure of a 9.7 per cent fall, and better than the 6.1 per cent fall expected by private-sector economists in a Bloomberg poll. Excluding the typically volatile biomedical manufacturing cluster, factory output fell 6 per cent year on year in March.

Still, economists do not expect a turnaround yet. Oxford Economics senior economist Alex Holmes predicts that output will trend further downwards in the next couple of quarters.

While China’s reopening may boost its import demand, this will likely be more than offset by slowing demand from the rest of the world, as tight monetary policy weighs on growth, he said.

Maybank economists Chua Hak Bin and Lee Ju Ye similarly expect the manufacturing contraction to persist for the first half of 2023. China’s recovery so far is largely driven by consumption and domestic services, with the subdued manufacturing and import recovery providing “limited demand spillover to regional countries’ exports”, they added.

A turnaround may only materialise in the second half of the year, as industrial activity stays subdued in Q2, said OCBC chief economist Selena Ling.

For the full year, she expects manufacturing output to contract marginally. Holmes also expects a full-year contraction, while UOB senior economist Alvin Liew maintained his full-year prediction of a 5.4 per cent fall.

Ling noted the risk of a technical recession for Singapore’s economy, but added that an outright full-year recession is less likely “if there is a moderate recovery in the global electronics cycle” in the second half of 2023.

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The Maybank team also flagged the risk of technical recession in Q2 if China’s reopening boost does not offset weakness in advanced economies. Gross domestic product (GDP) growth will have to be at least 0.2 per cent year on year in Q2 to avoid this, they estimated.

In contrast, RHB senior economist Barnabas Gan was more upbeat, maintaining his forecast for full-year industrial production growth of between 0 per cent and 2 per cent “with risks reasonably balanced”.

He noted “undeniable signs suggesting an earlier-than-expected momentum acceleration in Q2 2023”, such as the increase in manufacturing and export momentum.

On a seasonally adjusted month-on-month basis, Singapore’s overall manufacturing output increased 9.3 per cent in March, improving from the previous month’s 12.5 per cent contraction.

Barclays regional economist Brian Tan noted that a surge in biomedical manufacturing contributed to the partial rebound, though “the overall pick-up was not enough to fully reverse February’s contraction”.

Excluding biomedical manufacturing, production increased 5.1 per cent on the month on a seasonally-adjusted basis, in contrast to the 9 per cent contraction in February.

Cluster performance

In March, output fell 8 per cent year on year in the key electronics cluster, though this was an improvement from February’s drop of 11.4 per cent. Output fell for all electronics segments as demand declined.

“The worsening downward trend of Asia-Pacific semiconductor sales which turned more negative in February bodes further ill for semiconductor demand, affirming the electronics downcycle,” said UOB’s Liew.

Other clusters that recorded falls were:

• Chemicals (-11.8 per cent)
• Precision engineering (-7.1 per cent)
• General manufacturing (-5.6 per cent)

Chemicals was the worst performing cluster, though improving from February’s 14.8 per cent drop. The petroleum segment grew 12.5 per cent with higher demand for jet fuel, but contractions were seen in specialties (6.5 per cent), petrochemicals (20.3 per cent) and other chemicals (14.3 per cent).

The remaining two clusters experienced growth. The volatile biomedical manufacturing sector grew 7 per cent, in contrast to February’s 34.1 per cent contraction. Within this, the medical technology segment grew 18 per cent, but pharmaceuticals output fell 1 per cent. For the first quarter of 2023, biomedical manufacturing output is still down 1.8 per cent from the year-ago period.

The greatest rise was in transport engineering, with output up 23.5 per cent in an extension of February’s 22.4 per cent growth. This was on the back of a 48.4 per cent increase in marine and offshore engineering, and 22.5 per cent growth in aerospace. With the latest figures, the cluster’s output in the first quarter was up 17.7 per cent from the year-ago period.

Given the March data, economists estimated that Singapore’s first quarter GDP growth will be revised up marginally to 0.2 per cent year on year, from the advance estimate of 0.1 per cent. This is because the advance estimate assumed a 6.0 per cent contraction in Q1 manufacturing, but the March figures imply a 5.6 per cent fall.