Surprise expansion in manufacturing

[SINGAPORE] Singapore's manufacturing sector has got off to a surprisingly strong start in 2014, going by the improvement in January's purchasing managers' index (PMI).

The barometer of industrial activity swung back above the 50-point threshold that demarcates contraction from growth to a reading of 50.5, indicating that manufacturing expanded last month.

January's reading also beat the consensus market forecast of 50.1, surprising economists who had expected the Chinese New Year holidays to take some shine off manufacturing's performance - as is usually the case.

"The fact that the spike in PMI coincides with the supposed Chinese New Year lull does imply that companies are anticipating stronger orders beyond the festive season," said DBS economist Irvin Seah.

Indeed, the higher January PMI was thanks to further expansion in new domestic and export orders, as well as a return to growth in output and imports, said the Singapore Institute of Purchasing & Materials Management (SIPMM). The institute compiles the index monthly, from its survey of more than 150 purchasing managers at manufacturing companies here.

The electronics PMI also leapt 1.9 points to a January reading of 52 - its largest jump since January 2013. This too was due to more widespread reports of rising new orders and export orders. The electronics production sub-index in particular, hit a reading of 55.2, the highest in more than a year.

OCBC economist Selena Ling thinks that the latest readings further confirm that December's PMI was a blip. Then, the gauge had fallen under 50 to a reading of 49.7, indicating contraction. But data released by the Economic Development Board last month diverged from the PMI to show a 6.2 per cent year-on-year, and 5.2 per cent month-on- month, jump in industrial output.

January's readings thus bode well for the domestic manufacturing sector's outlook in the first half of this year, said Ms Ling.

However, not all believe that these positive signs will last. Credit Suisse economist Michael Wan said: "The lead indicators that we track for the region generally show a plateauing in industrial production momentum in Q1. The rise in PMI is probably more reflective of the good industrial production numbers in December, given that the (Singapore) PMIs are generally lagging or at best coincident, rather than leading, indicators."

SIPMM executive director Janice Ong said that there has been anecdotal evidence that the political turmoil in Thailand is diverting orders to Singapore's manufacturers. But economists believe that the impact would be slight at best.

UOB economist Francis Tan said that the clusters in which such diversion may occur, such as hard disk drives, make up only a small proportion of Singapore's manufacturing sector.

Mr Seah agreed: "I doubt the effect will be sustainable. Thailand still offers substantial cost competitiveness, compared to our local manufacturers."

Even the analysts who believe manufacturing has had a strong start in 2014, caution that risks to growth, both external and domestic, remain.

"There have been mixed signals in the US recovery. Problems in China's financial system have re-emerged with heightened risks involved. While global economic conditions are improving, it won't be a smooth flight to the moon," said Mr Seah.

Signs of persistent domestic supply constraints also showed up in the latest PMI report. Employment readings for both overall manufacturing and the electronics sector continued to indicate declines. This is probably due to the tighter labour market and policy measures to reduce the inflow of foreign manpower, said SIPMM's Ms Ong.