Singapore’s manufacturing growth eases to 7.4% in July

Manufacturing growth eased in July (7.4% y-o-y vs. 10.7% in June), despite an improvement in the volatile pharmaceutical sector. The decline was led by the electronics sector, but was quite broad based. The high-beta economy is clearly facing stiff global economic headwinds, which are expected to keep growth subdued in coming months.

Facts

Manufacturing output rose by 7.4% y-o-y (vs. 10.7% in June), right in between consensus (7.8%) and our conservative estimate of 7%. On a seasonally adjusted basis, output expanded 0.3% on m-o-m basis (vs. 1.9% in June) but declined -24.3% on a 3m/3m annualized basis (vs. -20.6% in June).

Had it not been for a spectacular jump in pharmaceutical output of 47.7% y-o-y (vs. 40.2% in June), the headline reading would have been worse. Again, the big jump for the pharmaceutical sector was due to a change in the output mix, implying higher value-added content in the latest batch.

Outside the biomedical cluster, it is less rosy. Manufacturing ex.biomedicals dipped 6.9% y-o-y (vs. +1.3% in June). In sequential terms, ex biomedical output contracted by 5.6% m-o-m sa following the 4.2% contraction in June. On a 3m/3m SAAR basis, the growth momentum also remains weak at -15.5% vs. -21.2% in June.

All ex-biomedical clusters saw slower growth or contraction. Growth slowed in chemicals (5.4% y-o-y vs. 11% in June), transport engineering (1.2% y-o-y vs. 12% in June) and precision engineering (7.1% y-o-y vs. 31.3% in June), while general manufacturing (-9.2% y-o-y vs. -4.6% in June) and electronics (-18.2% y-o-y vs. -15.3% in June) continued to contract.

Moreover, all segments within the important electronics sector saw a decline in output in July, except for 'infocomms & consumer electronics' (+22% y-o-y vs. 23.7%). Also, electronics output is contracting on a sequential basis, -5.4% m-o-m sa (vs. -11.5% in June), -40% 3m/3m saar (vs. -40.2% in June).

Implication

Singapore's high beta economy is facing stiff global economic headwinds, which could take the zing out of the economy if they do not die down soon. As we have seen from exports data earlier in the week, the weakness is primarily stemming from dwindling demand in the EU and the US.

Industrial production could still find some support near term as Japan gets back to full speed following the quake/tsunami.

Moreover, the still robust domestic demand conditions in Asia will also provide some cushion against weakness in the West.

However, if the global headwinds persist, which seems increasingly likely, the effect of this will dominate and growth will, consequently, continue to soften in Singapore.

The MAS will, nevertheless, still have to remain on guard against inflation risks, but a further tightening of the monetary policy stance in October is, in our view, certainly off the table the way things stand at the moment. If the downside risks to the global economic outlook materialize then it's, of course, a completely different ball game.

Bottom line: Industrial production slowed in July due to dwindling export demand from the US and Europe. Considering the downside risks to growth, a further tightening of the monetary policy stance in October is no longer on the table, in our view, despite the elevated level of inflation.