Surprise, surprise: August industrial production growth far from expectations

With the consensus forecast at 11.2%, the 21.7% expansion was a welcome surprise.

DBS Group Research said, “Apart from an exceptionally low base effect, the strong showing is largely driven by yet another surge in pharmaceutical output. The pharmaceutical segment grew a massive 156.7% YoY, up from 46.9% previously. This is even stronger than the prediction that we had penciled in this space last month: we had expected a ramp up in pharmaceutical production of about 100% in August, given its current production cycle.”

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More importantly, whether the economy will indeed fall into its second technical recession in three years will much depend on the sequential change in industrial output. On that front, a 3.9% MoM rise was reported, which is in line with our expectations. The better-than-expected performance in the pharmaceutical segment has provided a jab in the arm for the economy in averting a technical recession.

But such a robust trend in pharmaceutical production may not persist. Some plants are due to shift to different product mixes within the next 2-3 months, which would require temporary shutdowns in their productions. This will surely impact overall manufacturing growth. In addition, if not for the strong boost from the pharmaceutical segment, the manufacturing sector would have contracted by 10.7% YoY or 4.7% on a MoM sa basis. The fact that the pharmaceutical segment is the only factor keeping overall industrial production afloat for two consecutive months is not particularly comforting.

The main drag came from the electronics industry. Production output in this segment fell by 21.9% YoY, down from -17.2% in the previous month. Demand weakness and global uncertainties will continue to weigh on electronics production in the near term. Even an impending pickup in year-end festive season demand may be weaker than expected, given the backdrop of global recession risk.

Indeed, despite the strong industrial performance, it will not be enough to quash all the talks of a recession. The outlook remains bleak with the significant downside risk to growth. The economy is not out of the woods yet. Even if the economy managed to avert a technical recession in the third quarter, the risk of it falling back into the red in the fourth quarter cannot be ruled out, considering the dire global economic conditions. A lot really depends on how the economic situations in the US and the Eurozone pan out, as well as the policy responses from key economies around the world. A collective effort will be required to tackle this global problem.

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