July factory output points to stronger GDP growth in Q3

SINGAPORE — The economy is on track for stronger growth in the third quarter after factory output expanded for the second straight month in July. Economists said the momentum will be driven by the biomedical and transport engineering clusters, while the outlook for the electronics cluster remains clouded.

Total manufacturing output rose by 3.3 per cent year on year last month, accelerating from June’s 0.8 per cent growth, data from the Economic Development Board (EDB) showed yesterday. This paints a positive picture for third-quarter gross domestic product, said UOB economist Francis Tan.

“We are now expecting third-quarter GDP to grow by 3.3 per cent on-year, up from the second quarter’s 2.4 per cent. For this, we’ll need manufacturing output in the quarter to increase by 3 per cent and July’s 3.3 per cent growth will give that outlook some breathing space this month and in September,” he said.

“But this growth will be mainly a biomedical and transport engineering story, even though these sectors are volatile by nature, while I remain pessimistic over the performance of electronics,” he added.

Last month, the biomedical cluster gave the overall manufacturing performance a strong lift with its 28.5 per cent growth that followed June’s 1.6 percent rise and May’s 9.1 per cent decline. Despite the cluster’s volatility, its output rose a robust 12 per cent between January and last month.

“The biomedical industry had a subdued year in 2013, due partly to its investment cycle. Over the next one to two years, we can expect more plants coming online and production picking up to become a more sustainable driver for Singapore’s manufacturing economy,” said Credit Suisse analyst Michael Wan, who also expects third-quarter GDP to grow by 3.3 per cent.

Other bright spots in Singapore’s manufacturing sector include the chemicals cluster, where output rose by 9.2 per cent year on year in July and 8.6 per cent in the past seven months.

While marine and offshore engineering output fell 9 per cent last month, the sector has chalked up 8.4 per cent growth in the year to date.

“These sectors will remain the Republic’s edge for growth despite near-term volatilities because they are highly specialised and Singapore is well positioned against global competition,” noted Mr Tan.

Electronics output fell by 2.9 per cent year on year in July, the fourth straight month of decline, with the cluster — the biggest component in Singapore’s manufacturing — set for a consistent drop in output this year, due to a “firm-specific factor”, said the EDB in April.

However, Mr Wan remains hopeful, saying: “Stripping out this factor, we see electronics output picking up steadily over the past three months in sequential terms. If this continues, it should bode well for Singapore’s manufacturing performance.”

Barclays senior economist Leong Wai Ho agreed, saying: “We expect the sector to benefit from stronger demand from the United States in the months ahead, as indicated by the rise in the Institute of Supply Management’s new orders index in July to a seven-month high … which should trickle down to smaller swing producers in the region like Singapore.”