August manufacturing gets boost from electronics, biomed

Singapore

SINGAPORE'S key electronics sector may have expanded in August - reversing four consecutive months of contraction - but economists are viewing the surprise increase cautiously, since it was largely due to a low base a year ago.

Still, the increases in electronics and biomedical manufacturing output - which together make up over half of the industrial production index - saw factory output rise 4.2 per cent in August, and helped to offset a decline in transport engineering activity.

The overall pace of industrial production was slower than the market had anticipated. The 19 economists polled by Bloomberg before the Economic Development Board (EDB) released the data on Friday had been expecting manufacturing output to rise by 4.9 per cent.

Excluding the volatile biomedical sector - which grew 9.7 per cent last month on increases in both pharmaceuticals and medical technology production - output would have risen by a smaller 3 per cent.

The electronics cluster, which retains the largest weight of 33.4 per cent on the industrial production index, swung back into expansionary territory for the first time since March. Electronics production increased 7.2 per cent, although the bulk of this increase was technical in nature - there was a low base last year when demand for the computer peripherals was weak, and so the segment surged 42.2 per cent in August. The semiconductors segment increased 1.1 per cent last month.

Because of the base distortion, economists are hesitant to put too much weight on the electronics turnaround. Said UOB economist Francis Tan: "The negative impact from the 'firm-specific factor' mentioned by EDB back in their April report will likely continue to be felt throughout the rest of 2014, although we are grateful for this short breather in August. To date, the electronics cluster had expanded 2.2 per cent year-on-year, and persistent headwinds in this cluster over the next few months would continue to pull the average growth lower for the full year."

CIMB economist Song Seng Wun added that there is "a real possibility that the electronics rebound in August will be short-lived", reverting into a year-on-year contraction in September - this time due to an unfavourable base in 2013.

While output of the chemicals and precision engineering clusters rose, they did so at a slower pace than in July. Chemicals production expanded 2.3 per cent from 9.7 per cent previously, while precision engineering grew 1.9 per cent from 3 per cent a month before.

In contrast, declines were registered in the transport engineering and general manufacturing clusters. Transport engineering output fell 0.8 per cent in August, as its aerospace segment contracted 19.5 per cent due to fewer repair jobs from commercial airlines.

General manufacturing production declined 0.2 per cent.

EDB said that after adjusting for seasonal factors, industrial production contracted 0.2 per cent month on month in August. Excluding biomedical manufacturing, output would have increased by 4.6 per cent.

The decline was smaller than private-sector economists had earlier forecast - they had been expecting industrial production to fall 0.7 per cent in August from July, on a seasonally adjusted basis.

For the rest of 2014, economists expect industrial production to continue on a slow and low growth path. Said ANZ economists Daniel Wilson and Glenn Maguire: "Total year-to-date output is up 5 per cent year on year, however, the majority of this climb was recorded in Q1. Following the sharp moderation in activity in Q2, we have seen a mild rebound in production, however, the electronics sector has weighed on growth. Any improvement in growth from here will be capped by supply side adjustments."

Economists now expect Q3 GDP growth to come in between 2.4 per cent to 3.1 per cent year on year. These estimates are lower than the 3.2 per cent projection given by forecasters when polled by the Monetary Authority of Singapore (MAS) in late August.