Singapore manufacturing gloom deepens

SINGAPORE'S manufacturing sector contracted further in March, going by the latest purchasing managers' index (PMI), but economists are expecting things to turn around in the next two quarters.

Dipping further below the 50-point reading that demarcates growth from contraction, the barometer of industrial performance has now signalled four consecutive months of shrinking activity. This, after the sector's output fell a larger than expected 3.6 per cent in February.

But last month's reading of 49.6, down from February's 49.7, put Singapore in the company of other Asian economies - many of whom reported weaker PMIs on Wednesday.

Mixed readings from China - the official PMI indicated expansion while the HSBC PMI pointed to more contraction - left HSBC economist Frederic Neumann concluding that China's manufacturing has not seen its typical post-Chinese New Year lift this year.

Manufacturing conditions also deteriorated in Korea - with the PMI reading falling to 49.2 from 51.1. Taiwan's too fell to 51 points from 52.1 in February. These pullbacks suggest that "along with China, Asia's manufacturing centres are stalling", Mr Neumann said.

Even though equivalent readings in the US and Europe have been more positive, this has not led to stronger new export orders for Asia, he noted. This could be because Europe's economy is strengthening from a very weak base, the euro remains weak and the US economy is not benefiting as much from lower energy prices and strong employment growth as expected, Mr Neumann said.

For Singapore, it was indeed primarily a fall in new orders - both locally and from abroad - that led to the overall PMI's decline, said the Singapore Institute of Purchasing & Materials Management, which surveys more than 150 purchasing managers of industrial companies to compile the monthly index.

But Barclays economist Leong Wai Ho thinks that it has less to do with a lack of external demand. "It feels more like a mix of labour constraints on one hand and excess inventories on the other," he said.

"There were signs that manufacturers reduced production, preferring instead to run down excess inventory," he said. The inventory and finished good stockholdings sub-indices slid into contraction territory in March, which could mean that manufacturers were clearing existing stockpiles after the factory shutdowns over the Chinese New Year holidays in February.

There could also have been sector-specific factors at work. Mr Leong thinks the temporary shutdown of Jurong Aromatics Corp's plant - as it retooled operations to be able to run on cheaper naphtha to take advantage of lower oil prices, may have contributed to the weaker PMI. The plant has since restarted in late March, he said.

Amid the gloom, the electronics sector provided some cause for cheer, as the electronics PMI inched back up above the 50-point threshold to indicate expansion.

While Mr Leong read this as an encouraging sign that Singapore remains part of the improving PC and handset supply chain, as the summer launch season for consumer electronics draws to a close, OCBC economist Selena Ling was a little more circumspect.

Although the electronics sub-indices for new orders, new export orders and production all rose, new export orders remained in contraction territory with a reading of 49.5, she noted. Inventory and stockholdings also fell, and imports have moderated after six months of expansion. "This suggests that the domestic electronics industry recovery is still tentative and progress in Q2 may be sluggish as well," she said.

What observers do agree on, is that the overall outlook for Singapore's manufacturers should brighten up soon.

Capital Economics economist Daniel Martin expects exporting manufacturers to benefit later in the year, when the world economy starts to reap the benefits of lower oil prices, when the severe weather in the US passes and when the effects of China's stimulus will start to be felt.

"Singapore's exporters should also benefit from an improvement in competitiveness, given that the Singapore dollar has been one of the region's weaker performers over the last year or so," he said.

Ms Ling expects the manufacturing sector to shrink 3.4 per cent year-on-year in the first quarter, dragging GDP growth down to 1.6 per cent, which would translate into a one per cent quarter-on-quarter annualised drop.

Manufacturing should return to expansion in Q2, she says, estimating 1.4 per cent year-on-year growth, which could lift GDP growth to 2.4 per cent year-on-year.