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Industrial output shrinks for 6th straight month in July

SINGAPORE — Manufacturing output contracted for the sixth consecutive month in July, weighed down by declines in all clusters except chemicals, prompting analysts to warn that this weak start to the third quarter could drag the economy into a technical recession.

SINGAPORE — Manufacturing output contracted for the sixth consecutive month in July, weighed down by declines in all clusters except chemicals, prompting analysts to warn that this weak start to the third quarter could drag the economy into a technical recession.

Industrial output fell 6.1 per cent compared with a year ago, extending from the 4.4 per cent decline in June, data from the Economic Development Board showed yesterday. The performance was much weaker than the 3.3 per cent drop forecast by economists in a Reuters poll.

Industrial output accounts for about one-fifth of the Republic’s Gross Domestic Performance (GDP). Due to the dismal performance, economists are not ruling out the likelihood of a technical recession for the third quarter.

“Given the weak start to the third quarter of this year, manufacturing is likely to remain the main handicap for the Singapore economy in the near-term. Downside growth risks abound if the manufacturing sector continues to underperform and could potentially undershoot the estimated 2.7 per cent year-on-year contraction that we’ve pencilled in for the third quarter,” said Ms Selena Ling, head of Treasury Research & Strategy at OCBC Bank.

“As such, a technical recession cannot be fully ruled out at this juncture even though this is not our base-case scenario. Manufacturing would need to continue to contract 3 per cent year-on-year again in August and September for a technical recession to materialise,” said Ms Ling.

A technical recession is defined by two consecutive quarter-on-quarter contractions. On a seasonally adjusted basis, second-quarter GDP declined an annualised 4 per cent in the three months through June, the Ministry of Trade and Industry said earlier this month, reversing from 4.1 per cent growth in the preceding quarter.

However, even if a technical recession led by the manufacturing sector does materialise, it is not likely to have too devastating an effect on the average person, analysts said.

“A technical recession being pulled down by the manufacturing sector has little spill-over effects to the entire economy as the main drag this year is led by the biomedical cluster, which will not affect the man on the street that much because pharmaceutical companies are capital rather than labour intensive. It is less likely to lead to job losses and unemployment,” said Mr Song Seng Wun, an economist at CIMB Private Banking.

Last month’s industrial output declined in five out of six clusters — general manufacturing products, electronics, transport engineering, precision engineering and biomedical manufacturing — leaving chemicals as the sole bright spot.

The chemicals cluster increased 4.4 per cent on-year, led mainly by the specialties and petroleum segments. The biomedical manufacturing cluster declined by 13.4 per cent after a contraction in the pharmaceuticals segment offset gains from the medical technology segment.

The transport engineering cluster contracted by 6.1 per cent, led by declines in the marine and offshore engineering and land transport segments.

General manufacturing products and the precision engineering cluster also declined by 3.2 per cent and 6.2 per cent, respectively. The key electronics cluster, which carries the largest weight in the industrial production index, fell 5.8 per cent, mainly due to declines in output for semiconductors and computer peripherals.

“For the electronics sector, we really need a more decent recovery in purchases of automobiles, consumer durables like washing machines … A lot of our production goes into that. We hope that demand for these products from developed markets like Europe would help push up the performance,” said Mr Song. “We see a pickup for the sector soon, however it would probably be next year and the growth would be modest,” he added.

An ongoing consolidation in the IT industry may also possibly see electronic firms restructure their global operations away from Singapore, said Mr Ng Wei Wen, an economist at ANZ Research.

But not all analysts agree.

“This is a half-and-half possibility. Manufacturing in Singapore is highly specialised and will not be cheap, but we still see some growth in the electronics sector,” said Mr Song.

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