Manufacturing took some downers in May

Facts
Manufacturing output declined 17.5% y-o-y (vs. 9.5% in April). On a seasonally adjusted basis, output continued to contract (-3.8% m-o-m vs. -18.7% in April). This came well below consensus and our estimate of -9.3% y-o-y and -8.3% respectively.

The sharp decline in headline IP readings was led by the volatile pharmaceutical sector, contracting sharply in May (-43.2% y-o-y vs. -23.8% in April) due to changes in the output mix, implying lower value-added content in the latest batch.

Outside the biomedical cluster, manufacturing growth rose 2.2% y-o-y (vs. -0.3% in April). In sequential terms, ex-biomed output growth expanded 2.2% m-o-m sa following a 6.3% contraction in April.

Growth in the ex-biomedical clusters was led by chemicals (5% y-o-y vs. -5.4% in April) led by petroleum and precision engineering (37% y-o-y vs. 29.1% in April) led by machinery & systems on the back of strong demand for semi-conductor related equipment.

Electronics continued to decline, although at a slower pace (- 5% y-o-y vs. -7.6% in April). Within the electronics cluster, output of semi-conductors, data storage & 'other electronic modules and components' continue to contract in annual terms, partly reflecting last year's high base. However, 'computer peripherals' and 'infocomms & consumer electronics' pulled in the other direction.

Transport engineering also saw a contraction from last year, which was driven by the 'marine & offshore engineering' sector, seeing fewer deliveries of oil rigs and ship repair/maintenance. Output from 'General manufacturing industries' also declined over last year.

Implication
The weaker-than-expected number was entirely due to the pharma sector. But, beyond pharma, there is both strength and weakness. The chemical and precision engineering clusters are humming to their own tune, while the electronics sector and transport engineering are feeling the global headwinds.

Looking ahead, the global trade cycle is expected to be soft weak for a while longer as the global inventory correction unfolds and the supply chain disruptions related to the Japan quake continue to wash through the global economy. However, these global headwinds are expected to die down in the second half of the year as inventories have slimmed down and Japanese companies are back to full speed.

Thus, with the softening in growth expected to prove temporary, capacity will remain tight and the MAS will have to remain on guard against a further build up in demand-led inflation.