August contraction a ‘blip,’ IP momentum to still improve in 4Q – expert

RHB cited 2 factors for the deeper-than-expected manufacturing output decline in August.

Experts are still positive that industrial production (IP) momentum will still improve by 4Q23 despite the contraction recorded in August.

RHB Senior Economist Barnabas Gan said the deeper-than-expected decline in the manufacturing output is “probably a blip.”

“We see little indication that a decline of such magnitude in sequential numbers could persist in 4Q23,” Gan said.

Gan attributed the August contraction to “a mix of lacklustre export data in the same month and an adjustment to the recent climb in electronics inventories.”

“Singapore’s production activities outpaced export activities at the start of 3Q23, as seen in the purchasing managers’ indices, thus resulting in a widening production – new export spread,” Gan said.

Gan added that three factors will support the improvement of Singapore’s IP momentum:

“First, signs are pointing towards an uptick in the electronic trade cycle, led by a potential bottoming of global semiconductor sales.

“Second, we view global rate objectives to peak in the months ahead, following ECB’s Madis Muller suggesting no further rate hikes in the coming months as current levels are probably sufficient to return inflation to the 2.0% target. This is coupled with the US FOMC's latest dot-plot chart, which pencils just one more rate hike towards the end of 2023, with rates to decline in 2024.

“Third, high-frequency Global+Asia, ex-China, economic data suggests a continued improvement in the momentum of externally-facing activities.”

Whilst RHB believes IP momentum will improve, it still downgraded its industrial production (IP) growth forecast to -4.0% in 2023, against its prior 0.0% outlook. 

UOB also revised its 2023 full-year industrial production forecast, downgrading it to -7.0% from its earlier projection of -5.4%

Contrary to Gan, UOB Senior Economist Alvin Liew believes that IP recovery will only emerge earliest in 1Q24.

“The latest IP reading reaffirms that the electronics downcycle and more broadly, the trade downcycle has yet to find a bottom,” Liew said.

“With external demand likely to weaken further amidst an elevated interest rate environment and tighter global financial conditions, we expect the weakness in manufacturing activity to persist for the rest of the year,” he added.