Downside risks cloud S'pore growth

[SINGAPORE] The Republic's economic growth now faces downside risks for Q2 and 2014 after the manufacturing sector slipped into contraction mode last month, for the first time since June last year.

Surprised by the dismal performance, private-sector economists now say that full-year GDP growth will fall short of earlier forecasts - and will, in all likelihood, be lower than 2013's 3.9 per cent expansion.

Contrary to expectations, factory output declined 2.5 per cent in May year-on-year (sharply down from April's upwardly-revised 5.3 per cent increase), pulled lower by drops in both the electronics and biomedical manufacturing clusters.

Economists polled by Bloomberg before the Singapore Economic Development Board (EDB) released the numbers yesterday had been expecting industrial production to rise by 2.4 per cent; only two of the 23 economists surveyed had anticipated May's contraction in factory output.

Excluding the volatile biomedical sector - which contracted 9.2 per cent last month on lower production of active pharmaceutical ingredients - output would still have fallen, albeit by a smaller 0.5 per cent.

The electronics cluster, which retains the largest weight of 33.4 per cent on the industrial production index, proved the biggest drag on manufacturing output. Electronics production fell 7.5 per cent year-on-year in May; the semiconductors, computer peripherals, and data storage segments fell 6.4 per cent, 11.8 per cent, and 29.2 per cent respectively.

Output of all other clusters rose, except general manufacturing industries which fell 1.1 per cent.

EDB said that after adjusting for seasonal factors, industrial production contracted 5.7 per cent month-on-month in May - far larger than forecasters' expectations of a 0.6 per cent decline. Excluding biomedical manufacturing, output would have increased 0.4 per cent.

Economists were expecting the hit to electronics production, given EDB's April report which stated that a "one-off" and "firm-specific factor" will cause a "decline . . . in year-on-year growth for the rest of the year" in the semiconductors segment.

But while economists have been forewarned of the contraction in semiconductor output, they are still trying to figure out the magnitude of the impact - especially since EDB has continued to decline to share the name of the company, the specific reasons for the output fall, and the nature of the company's operations, citing company confidentiality reasons.

"Add to that the volatility of the biomedical cluster - sure susah lah," said CIMB economist Song Seng Wun, using a Malay term to describe the challenging situation. Indeed, the pull-back in biomedical manufacturing - which posted double-digit expansions in February, March

and April - resulted in a "double-whammy" effect on overall factory output, and caught most off-guard.

The latest data has turned economists more pessimistic about Singapore's growth prospects not just for Q2, but for 2014 as a whole.

UOB economist Francis Tan has revised his full-year industrial production forecast down to 3.5 per cent from 5 per cent previously; his Q2 GDP growth forecast of 4 per cent could also "potentially be downgraded" to 3.1 per cent. The government is expected to release its advance Q2 GDP estimates by mid-July.

While Mr Tan and ANZ economist Daniel Wilson are waiting "a few more months" to get a clearer picture of electronics' (and therefore manufacturing's) performance, they agree that 2014 GDP growth will likely come under last year's 3.9 per cent expansion.

CIMB's Mr Song has tempered his initial expectations of 4.3 per cent economic growth to 3.8 per cent; Citi economist Kit Wei Zheng sees "small downside risks" to his 3.5 per cent forecast for 2014, although growth above 3 per cent remains "possible" in his view.

Several economists also flagged the increasing downside risk to the long-awaited export-led recovery in the second half of this year. Mr Song said that this is especially "with the return of geopolitical risks from the unfolding civil war in Iraq, (which has been) pushing up oil prices and pushing down consumer confidence".

Still, other economists such as Barclays's Leong Wai Ho and OCBC's Selena Ling remain sanguine about the manufacturing sector here; the former "continues to see room for a recovery in (the electronics) sector as the US investment cycle gathers steam".

Added Ms Ling: "This marks a breather in Q2 manufacturing growth momentum, but should not detract from the steady but stable GDP growth trajectory expected for Singapore for the year as a whole."