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Biomed boost fails to save Singapore's May factory output from surprise drop
SUSTAINED strength in pharmaceutical production was not enough to save Singapore's factory output from a surprise fall in May, after two straight months of growth.
Economists have now stuck to forecasts of a double-digit economic contraction in the second quarter, even as the Republic emerges from a two-month quasi-lockdown to contain the spread of the novel coronavirus.
Still, the looming recession will be on the shoulders of the services and construction sectors, while manufacturing has potential upsides in store.
Industrial production fell by 7.4 per cent year on year in May, in line with a drop in non-oil domestic exports reported earlier, according to preliminary data out on Friday.
The Economic Development Board (EDB), which compiles the manufacturing data, largely fingered the virus pandemic and the "circuit breaker" for the slowdown in production and weakness in end-market demand.
That's even as higher production of active pharmaceutical ingredients and biological products buoyed biomedical manufacturing, which was once again the only cluster to expand.
May's broad-based decline was 10.4 per cent after excluding the volatile biomedical manufacturing cluster.
Private-sector watchers, who had hoped for the manufacturing sector to post a hat trick in the second quarter, are not rosy about the impact of the shock drop on the economy.
With the latest slip, United Overseas Bank economist Barnabas Gan expects second-quarter industrial output to come in flat year on year and shrink by 2 per cent for the full year.
Noting that factory activity has slowed in April and May from the first three months, Barclays Bank economist Brian Tan wrote that "services sector activity also likely collapsed after the imposition of the government's circuit breaker measures".
The EDB explicitly attributed lower medical technology output and scaled-down general manufacturing work to the circuit breaker. Marine and offshore engineering output also suffered from a labour slowdown in shipyards, it added.
Given the circuit breaker, watchers expect second-quarter gross domestic product to shrink year on year. Citi's Kit Wei Zheng and Ang Kai Wei pegged the decrease at 14.3 per cent while Maybank Kim Eng's Chua Hak Bin and Lee Ju Ye have posited a more pessimistic 20 per cent.
Yet manufacturing has still done more than its fair share of economic heavy lifting, analysts pointed out.
"We are expecting manufacturing to avoid a contraction in the second quarter," Dr Chua told The Business Times. "The pandemic recession is largely a services recession, as the circuit breaker shut down a large portion of the services sector."
There is still room for expansion in key areas such as semiconductors, where factory output grew by 1.6 per cent even as the overall electronics cluster saw a contraction.
"The manufacturing outlook is improving as countries exit from lockdowns and consumer spending normalises," the Maybank Kim Eng team wrote. "Demand for pharmaceuticals will stay resilient while semiconductor production will be supported by data centres and cloud services."
Other bright spots cited by the Citi team include medical exports, which "could offset potential semiconductors drag", and investment pledges in both manufacturing and services.
UOB's Mr Gan said the virus and the possibility of intensifying trade tensions would pose "formidable drags to Singapore's overall manufacturing environment".
"However, some interim support from production and exports of biomedical products given the uptick in global demand for medical necessities may cushion the downside."
JP Morgan analyst Ong Sin Beng added that, with expectations of a second-half recovery, a pick-up in Singapore's manufacturing sector should appear in the June purchasing managers' index - an early sentiment gauge slated for release next week.