Weaker January output raises questions about manufacturing recovery

[SINGAPORE] What should we do with January? If economists had their way, they would wish the month away.

Weaker-than-expected trade and industrial production figures in the first month of 2014 have divided private-sector economists, who are split on whether Singapore's export and manufacturing recovery remains intact.

Industrial output grew a smaller-than-expected 3.9 per cent from a year ago, disappointing the market's expectations of a stronger 6.5 per cent expansion. Excluding the biomedical sector, output would have increased 3.7 per cent year-on-year.

Some have chalked up January's tepid showing to seasonal factors and little else. They maintain that there is "no need to be alarmed" since output performance is expected to bounce back.

But others say that the latest data suggests the manufacturing recovery may be losing steam, and remain unconvinced that a pick-up in external demand is indeed coming through to Singapore.

According to figures released by the Economic Development Board (EDB) yesterday, after adjusting for seasonal factors, industrial production declined 8.1 per cent month-on-month in January - the first decline since August last year.

Excluding biomedical manufacturing, output would have fallen 8.1 per cent as well.

This contraction was significantly larger than what private-sector economists had forecast - they had been expecting industrial production to fall a more modest 3.7 per cent in January from December, on a seasonally adjusted basis.

General manufacturing and precision engineering contracted 4.2 per cent and one per cent, respectively, while transport engineering and electronics output slowed drastically in January, after sustaining several months of double-digit increases.

Transport engineering output grew by only 2.7 per cent in January from 14 per cent in December, while electronics output expanded 7.4 per cent in January from 22.3 per cent the month before.

Economists from DBS, OCBC and UOB said the softness in last month's manufacturing performance was largely due to the Chinese New Year holiday, which fell in January this year.

DBS's Irvin Seah and UOB's Alvin Liew also pointed to extreme weather conditions in the US, where an unusually cold winter likely impacted US consumer demand last month.

Despite January's disappointment (which economists say could extend into February), the DBS, OCBC and UOB economists say they continue to be sanguine about Singapore's manufacturing sector in 2014.

Said OCBC's Selena Ling: "We had earlier cautioned on the seasonal impact of the Chinese New Year holiday timing, and this does not detract from our optimism that the manufacturing recovery remains intact."

But Citi economist Kit Wei Zheng and Bank of America Merrill Lynch (BAML) economist Hak Bin Chua think otherwise.

According to Mr Kit, the lacklustre January industrial production performance shows that a convincing pick-up in external demand remains to be seen. He noted that the sequential decline in electronics output is in line with recent non-oil domestic exports (NODX) data.

Dr Chua agreed: "(Singapore) exports were also weak in January (-3.3 per cent), consistent with weak exports in Korea (-0.2 per cent), Taiwan (-5.3 per cent) and Thailand (-2 per cent). Overall, Asia's export recovery on the back of stronger US growth remains somewhat unconvincing."

The BAML economist also noted that January's manufacturing output was "especially disappointing", given January 2013's low base.

And, while base effects from February last year could mean a modest improvement in output in the near term, Dr Chua questioned whether "the manufacturing recovery may be losing steam".

He said: "Singapore's sensitivity and leverage to global growth has probably fallen, given economic restructuring and labour constraints."

Nevertheless, both he and Mr Kit agreed that January's softer-than-expected showing could have been exaggerated by seasonal effects. "As always, it is hard to draw strong conclusions from the January data due to the moving Chinese New Year holiday, and the Q1 numbers will have to be viewed in totality," said Citi's Mr Kit.

Added DBS's Mr Seah: "The seasonal effects in January and February are very real and significant, which is why I typically discount numbers from the first two months of the year as they tend to be dicey. We'll have to wait until March (and onwards) to have a clearer idea - one data point will not be able to tell us the full picture."

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