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Nikkei Markets

Singapore's factory output surprises with contraction

Electronics, chemicals, pharmaceuticals show weakness

Singapore’s manufacturing output from three of the largest manufacturing segments, electronics, chemicals and pharmaceuticals, declined In September.   © Reuters

SINGAPORE (Nikkei Markets) -- Singapore's manufacturing output unexpectedly fell in September, suggesting the economy was finally beginning to feel the chill from trade tensions and slowing growth elsewhere.

However, the authorities appeared unperturbed, with the central bank saying the economy was on track to grow at a "slower but steady pace."

In its half-yearly macroeconomic review, the Monetary Authority of Singapore pointed to strength in services clusters such as finance and technology as a reason for its view.

According to data from the Economic Development Board, output from three of the largest manufacturing segments declined in September, causing total production to contract 0.2% from a year ago.

The year-on-year drop, the first since December, came as a surprise as the median forecast of economists in a Reuters poll was for an increase of around 3.5% in September.

Factory output grew 3.7% in August.

"There have been clear signs of a slowdown in many production sectors in recent months, but until now, there has usually been one sector, or sometimes two, that put in a heroic performance and kept the overall index from slumping," Robert Carnell, ING's chief economist and head of research for the Asia-Pacific, said in a note on the bank's website.

"The breadth of the weakness in surprising mainly in that it hasn't happened earlier," he added.

On a seasonally adjusted month-on-month basis, Singapore's manufacturing performance looked even weaker as the decrease of 4.9% marked the third straight month of contraction.

EDB said output of electronics fell 5.5% on-year in September, hurt by a sharp decline in computer peripherals. Electronics expanded by 5.9% in August.

Chemicals shrank 7.1% due partly to maintenance shutdowns in the petrochemicals and petroleum segments.

Production of medical technology products fell 5.8% on year, while pharmaceuticals dropped 11.1% due to a different mix of active ingredients produced during the month. Pharmaceuticals had been one of the better-performing segments within Singapore's manufacturing sector this year.

Transport engineering was the standout during the month as output increased 39.4%. The growth was led by marine and offshore engineering, which expanded 71.4% due to the low base a year ago as well as a higher level of activity, EDB said.

Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye said in a note that the risks to growth were tilted to the downside. China's slowing economy and the trade war could hit services related to trade while government measures to cool property prices could damp business services in the third quarter, they said.

However, employment figures have remained strong so far.

In a report on Friday, Singapore's Manpower Ministry said the labor market showed further signs of improvement during the third quarter, with total employment growth more than double the figure for the preceding quarter. Retrenchments were also lower although the overall unemployment rate edged up to 2.1% in September from 2.0% at the end of June.

The MAS, in its report, reiterated that gross domestic product growth would fall in the upper half of the 2.5%-3.5% forecast range this year before moderating slightly in 2019.

MAS said that banks are likely to benefit from higher interest margins as the U.S. and other advanced economies raise interest rates. It added that higher borrowing costs have thus far not dampened loan demand, which remains strong in East Asia and the Americas.

As for information and communications technology services, demand remains strong as both the public and private sectors have ramped up cybersecurity and digitalization.

The financial sector accounts for about 13% of Singapore's GDP while information and communication services make up another 4.2%. Manufacturing accounts for around 20%.

MAS's macroeconomic review fleshes out the rationale behind the central bank's latest monetary policy statement, which was to allow a faster appreciation of the Singapore dollar in the face of an uptick in inflationary pressures.

--Kevin Lim

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