Business

Strong manufacturing sector rebound could lead Singapore's economic recovery

Strong manufacturing sector rebound could lead Singapore's economic recovery
Singapore’s manufacturing sector posted its strongest performance of 2016 in the last three months of the year, with experts sharing optimism over business prospects during the first half of this year. Photo: Bloomberg
Published: 11:25 PM, February 5, 2017
Updated: 5:29 PM, February 6, 2017

SINGAPORE — What a difference a year makes: 2016 was the year when the manufacturing sector went into the doldrums but on the back of a global pick-up in demand especially for electronics, hopes now rest on the sector this year to lead the Singapore economy out of the woods, experts say.

In contrast, there are concerns over the services sector, which is suffering from geopolitical uncertainty, low consumer and business confidence as well as technological disruption.

The strength of the manufacturing recovery had surprised some 
economists.

Heading into the new year, the manufacturing sector posted its strongest performance of 2016 in the last three months of the year.

Advance estimates from the Ministry of Trade and Industry (MTI) showed that year-on-year, the sector grew at an eye-catching 6.5 per cent between October and December, compared with -0.4 per cent in Q1, 1.5 per cent in Q2 and 1.7 per cent in Q3.

Mr Chua Hak Bin, senior economist at Maybank Kim Eng Research, said: “The broadening demand for chips across a range of new technology segments, including cloud (computing), Internet of Things, automobiles and power management — not just smartphones — is driving global electronics demand.”

ANZ economist Ng Weiwen cited the digitisation wave sweeping through the global economy, with businesses digitising their operations and leading to a rise in 3D printing, for example, as well as demand for consumer goods.

“Digital consumer goods need electronic parts especially semiconductors, and producers of this — South Korea, Taiwan, Singapore — are the beneficiaries from this increase in technology demand globally,” Mr Ng said.

“The (rebound) was slightly surprising. It surprised a lot of research houses ... What we are seeing is very firm demand for manufacturing products particularly in electronics.”

Around the world, purchasing managers’ indices — which measure the health of the manufacturing sector based on indicators such as new orders and inventory levels — are showing improvements.

“The sector is clearly out of the doldrums for everyone. That is also because the United States is on a firmer footing and the Chinese economy is stabilising. It is a synchronised upswing,” Mr Ng said.

 

REBOUND EXPECTED TO 
CONTINUE, SAY EXPERTS

 

Recent manufacturing data from the Economic Development Board (EDB) showed that manufacturing output increased 21.3 per cent in December, led by growth mostly from the electronics and biomedical manufacturing clusters.

The semiconductor segment, in particular, has grown at double-digit rates over the past 10 consecutive months, indicating a consistent pick-up in demand as opposed to growth coming off a low base, said economists.

Factory activity expanded for the fifth straight month in January, according to data from the Singapore Institute of Purchasing and Materials Management.

The latest quarterly business expectations survey for the sector by the EDB revealed last week showed that manufacturers here are slightly optimistic about business prospects in the first half of this year.

Experts expect the sector to continue its recovery in the months ahead. “We think the leading indicators suggest that the manufacturing rebound will continue for the first half of the year,” Mr Chua said.

However, Singapore Manufacturing Federation’s president Douglas Foo sounded a note of caution. Many manufacturing firms are still struggling and challenges remain for the sector.

“Certain segments are indeed doing relatively well in spite of what is happening on the global front. There are, however, many firms in the manufacturing sector that are still struggling with the challenges due to the effects of globalisation, technological disruptions and the oil-and-gas downturn,” Mr Foo said. “Businesses remain cautious of the impact which the uncertain geopolitical new order will have on their businesses. On top of that, the high cost of labour and rental remain key challenges.”

 

‘SERVICES SLUMP TEMPORARY’

 

In the services sector, pessimism among firms has deepened due to the uncertain global climate.

In a recent survey on companies’ outlook for the next six months conducted by the Department of Statistics Singapore (Singstat), a net weighted balance of 14 per cent of respondents are expecting conditions to worsen in the first half of this year compared with the second half of last year, and compared with 8 per cent in the previous quarter’s survey.

Growth in the services sector has been tepid last year — hovering in the range of slightly above 0 per cent to 1.6 per cent for each quarter on an annual basis.

MTI’s advance estimates put the sector’s 2016 full-year growth at 0.9 per cent, dropping sharply from the 3.4-per-cent growth in 2015.

Mr Ng said: “The services sector has a lack of positive drivers … The mood is cautious as businesses and consumers become cautious with 
their spending.

“The sector continues to be confronted by uncertainties, largely on details about what (United States President Donald) Trump’s policies mean for US and the rest of the world.”

Association of Small and Medium Enterprises president Kurt Wee noted that there has been “quite a bit of headcount trimming in the sector, and businesses are careful in managing costs”.

Still, he believes the situation has bottomed out and it is unlikely to get worse. “We believe that there is a substantial consolidation in the sector already. Things may stay flat for a while, but we don’t think that things will worsen,” he said.

Agreeing, economists expect the sector to recover from its rough patch soon, with the upswing in the manufacturing sector providing a fillip.

“Historically, both sectors tend to track each other quite well. This decoupling is a temporary situation and should soon revert to historical conventions,” said Mr Ng.

Mr Chua noted there are already signs that trade-related services — such as wholesale trade, and transport and storage services — are improving, and this is good news for the Singapore economy. “Manufacturing and exports will lead this recovery, while services will likely track the recovery with a lag,” Mr Chua said.