Singapore factory sentiment turns negative after almost three years

SINGAPORE manufacturers have turned sour on factory activity, with the Purchasing Managers' Index (PMI) - an early indicator of sentiment - falling into negative territory.

The headline PMI dipped to 49.9 in May, down by 0.4 point on the month prior, in data from the Singapore Institute of Purchasing and Materials Management (SIPMM) on Monday.

With readings below 50 pointing to industry contraction, the latest showing broke a 32-month winning streak, and came amid deterioration in the trade war between the United States and China.

May saw the US hike tariffs on US$200 billion of Chinese goods, with China retaliating with higher duties on American imports. The US also blocked leading Chinese telecom supplier Huawei from buying American parts, and China is mulling over a blacklist of its own.

"Anecdotal evidence suggests that manufacturers are increasingly concerned about the escalation of trade tensions between the world's two largest economies," the SIPMM said.

Singapore manufacturers' negative PMI came on slower growth in areas such as new orders, new exports, factory output and inventory, while order backlogs stayed negative for the eighth month running.

Meanwhile, the electronics segment continued its decline for the seventh straight month, with the sector's PMI reading dipping by 0.1 point on the previous month to 49.4, on the back of a slump in new orders, new exports, and employment.

Although electronics imports and input prices posted growth, other areas -  factory output, inventory, finished goods and order backlog - were negative.

Alvin Liew, senior economist at United Overseas Bank, noted that worsening US-China trade relations "probably contributed to the weaker PMI in May".

"The outlook for manufacturing is expected to worsen further if additional US tariffs are imposed on the remaining US$300 billion of Chinese exports to the US after the end-June G20 meeting," Mr Liew added, referring to the US threat of more duties to come.

He said that fresh US tariffs could deepen a slowdown in Chinese growth, which might take a toll on Singapore's manufacturing as well.

"Overall, the outlook for trade-related industries remains soft against the backdrop of a growth moderation in key economies as well as uncertainty due to trade conflicts and the cyclical downturn facing the global IT industry," said Standard Chartered economist Jonathan Koh.

Sanjay Mathur, ANZ chief economist for South-east Asia and India, told The Business Times that "it is always hard to predict a PMI, but it is likely to stay below 50 for some time".

Manufacturing activity will likely remain weak, he said, citing not just electronics but also segments such as petrochemicals and offshore engineering as soft spots.

Elsewhere in the Asia-Pacific, major exporters such as Japan, South Korea and Taiwan also reported negative factory activity in manufacturing PMI data for May.

Meanwhile, China's factories still notched expansion in May, according to the private Caixin PMI survey, but some watchers have pegged the front-loading of US-destined exports as the driver.

Barclays economists said in a report that "the re-escalation of trade tensions and the renewed weakening in China's high frequency data will likely force many market participants and policymakers to re-examine their assumption" of recovery in the second half of 2019.

They added that, even before the tariff woes ramped up, "manufacturers were already cutting prices to boost sales, a sign that demand conditions were already weak to start with".