June industrial production results surprise on the upside
Data just released today was a sharp improvement at 7.6% yoy compared to market expectation for less than 3%.
According to OCBC, the boost was mainly driven by the volatile pharmaceuticals industry (+68.7% yoy) due to a different mix of active pharmaceuticals ingredients.
The May IP data was also revised higher from the initial 6.6% yoy (+1.8% mom sa) to +6.8% (+2.8% mom sa).
"It looks like the manufacturing sector probably troughed around March and April and has seen two consecutive months of improvement," said OCBC.
Outside of biomedicals, the electronics contraction is also easing, falling by a more modest 4.5% yoy versus the -9.4% and -12.2% yoy seen in May and April 2012.
More importantly, OCBC noted that the better-than-expected June IP data suggests that the flash Q2 GDP growth estimate is likely to be revised up from the initial 1.9% yoy (-1.1%) to 2.4% yoy (+0.8% qoq sa) ceteris paribus.
"This means that the revised Q2 GDP growth likely expanded sequentially, and the probability of a technical recession in Q3 (which was not our baseline scenario) has probably diminished further, assuming no further deterioration in the Eurozone debt crisis or China’s slowdown," it said.
However, OCBC cautioned that the growth drivers for manufacturing outperformance is still not yet broad-based – note the chemicals and precision engineering clusters are still contracting and momentum in the transport engineering and general manufacturing clusters are also slowing.
Excluding biomedicals, manufacturing output actually fell 1.5% yoy and 3.8% mom in June (the third mom sa contraction for the year-to-date).
Looking ahead, OCBC said that Q3 should continue to see some gradual improvement in manufacturing momentum given the low base in Q3 2011, especially if the biomedical cluster, specifically pharmaceuticals, sustains its current levels of production.
"However, the external environment remains dovish, given the global economy is losing traction and risks pertaining to the Eurozone debt crisis and Chinese slowdown. Global leading indicators like manufacturing Purchasing Managers Indices, the semiconductor book-to-bill ratio, and export orders for Taiwan for instance, are also not very encouraging at this juncture," it added.