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Hopes remain high despite dip in May PMI

Index slips to 50.8, from April's six- month high of 51.1

[SINGAPORE] Manufacturers in Singapore ran down their inventories and stocks of finished goods in May, but this could soon be followed by a fresh round of stocks being built up to meet the gradual pick-up in export demand that is expected next quarter.

Lower inventory and finished goods sub-indices pulled May's purchasing managers' index (PMI) down to a reading of 50.8, from April's six-month high of 51.1. This also disappointed market economists who had expected that the index - seen as a barometer of manufacturing activity - would rise to 51.3 last month.

However, by keeping above the 50-point threshold which demarcates expansion from contraction, the PMI still signalled growth, just at a slower pace. And the electronics PMI, which held steady at 50.4 in May, was an encouraging sign to observers, particularly after April's manufacturing figures presented a surprise dip due to a cutback in production at a single semiconductor plant.

Singapore's overall reading was not inconsistent with the mixed set of May PMI reports from across the region this past week.

Taiwan's HSBC PMI, also released yesterday, rose marginally to 52.4 in May, from 52.3 in April. But its manufacturing sector still lacks momentum as domestic demand remains weak, HSBC economist John Zhu said. South Korea's PMI dipped into contraction zone with a reading of 49.5, while Japan's remained unchanged at 49.9.

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More importantly, for many of Singapore's producers, China's HSBC PMI rose to a four-month high. The reading of 49.4 signalled less of a deterioration in business conditions, an improvement that was in line with China's official PMI for May. The official PMI showed manufacturing growing at its fastest pace in five months, backing views that the China government's targeted measures to boost growth are gaining momentum.

DBS economist Irvin Seah expects the improvement in China's manufacturing to have an impact on Singapore, after a brief time lag. He thinks that the PMI will continue to ease to the 50-point mark in the next couple of months, but that manufacturing will keep growing, month on month. "We will see a more sustained improvement when we move into the second half," Mr Seah said.

Barclays economist Leong Wai Ho thinks that with better external economic conditions, the dip in May PMI warrants little concern. "The improving US investment cycle tells us to expect more orders from G-3 in the coming months and that orders from North Asia for Singapore will start to pick up as well," he said.

Both Mr Leong and Mr Seah see the lower PMI as due to a running down of inventories, as local manufacturers tweak activity levels to adjust for overly optimistic production in the first few months of the year. Mr Leong said: "This behaviour tends to precede a fresh wave of re-stocking, which we expect will lift PMIs higher in Q3. Apple's new phone will be released then, and is expected to provide some impetus to purchasing activity."

Signs of this can also be picked up from the PMI's imports sub-index's continued expansion, said Janice Ong, executive director of the Singapore Institute of Purchasing & Materials Management, which polls more than 150 industrial companies to compile the monthly PMI. This indicates that "local manufacturers are anticipating a surge in order demands in coming months", she said.

But Bank of America Merrill Lynch economist Chua Hak Bin was less bullish about manufacturers' outlook. "The much-anticipated pick-up in global demand may remain patchy and elusive, given the tepid US recovery and China's mini fiscal austerity."

OCBC economist Selena Ling, too, believes that the Asian manufacturing and export recovery theme remains in an infancy stage for now. And the slipping sub-indices of the electronics PMI - for inventory, imports and order backlog - could be read as hints "that the thus far resilient electronics industry may find it challenging to continue to hold up growth momentum", she said.

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