Believe it or not: Singapore is in a technical recession

Manufacturing output down for three months in a row.

Singapore’s PMI stayed in contraction territory (<50) for the second straight month, retreating 0.4 pt (-0.7 pt in Aug) to an 8-month low of 48.7. Not surprisingly, softer orders and output were the culprits.

According to CIMB, while there is no direct correlation between monthly PMI readings and the overall performance of the industrial sector, it estimates that the economy likely shrank 2% qoq SAAR in 3Q12, led by a 5% fall in the
goods-producing sector and a 0.6% dip in the service sector.

"Singapore is in a technical recession," CIMB analyst Song Seng Wun said.

Here's more from Song:

Manufacturing production, as proxied by the Singapore Institute of Purchasing and Materials Management’s (SiPMM) PMI, gave up another 0.4 pt to 48.7 in Sep (-0.7 pt in Aug), below consensus and our estimates of 50.5 and 48.9 respectively.

The decline was broad-based, with all but one sub-index increasing mom. Production fell 0.7 pt to 49.6 (+0.5 pt in Aug), with Orders staying in contraction mode for the third straight month, at 47.5 (-0.6 pt). Worryingly, New Export Orders index fell 1 pt to 49.4, its first contraction for a non-holiday month this year. This bodes ill for 4Q manufacturing.

Tech weighed down by weak orders and rising inventories
Tech PMI also fell last month, by 0.7 pt, its fourth sequential decline in five months. The reading of 50.0, indicating neither expansion nor contraction, provides little comfort (+1.5 pts in Aug) since New Orders fell 0.8 pt to 48.4
(+0.4 pt in Aug), the weakest this year. The silver lining is New Export Orders were up 0.1 pt to 52.5 (+3.6 pts in Aug), the second consecutive month of expansion, reflecting perhaps inventory re-stocking by overseas buyers.

Despite this, the overall dip in New Orders caused tech firms to end up with higher inventories. After three months of decline, Finished Goods Inventory jumped 6.1 pts to 55.7, the highest in 17 months. This brought the New Orders-to-Inventory ratio to 0.87, its lowest since Jan 09’s 0.81, suggesting limited scope for production expansion.

Tipping Singapore into recession
Headwinds are aplenty for trade-dependent Singapore, including recessions in Europe and the slowdown in the US. Singapore’s manufacturing weakness in Sep/3Q12 followed similar patterns across export-oriented Asia, with Japan, Korea and Taiwan all in contraction mode for the fourth consecutive month.

Singapore was likely in a technical recession in 3Q12, defined as two consecutive quarters of contraction. Its economy probably shrank 2% qoq SAAR in 3Q12 (-0.7% in 2Q12), led by a 5% fall in the goods-producing sector, particularly manufacturing, and a 0.6% dip in the service sector. Yoy, manufacturing probably expanded just 0.1% vs. 2Q12’S 4.6%. Assuming the service sector grew at a similar yoy pace as in 2Q11 (1%), advance 3Q12 GDP should come in at 0.8-1% yoy (2Q12 GDP: 3.6%), outside the lower end of the government’s 2012 growth target of 1.5-2.5%. The government will be releasing preliminary 3Q12 GDP data next week, no later than 12 Oct.