Hooked on drugs: Pharmaceutical manufacturing up 31 %

But things are slowing up with just a 2.2% growth over September, pointing that we may be close to the peak. According to HSBC, the number points to a pick up in activity in Q4 led by pharmaceuticals, but output growth will slow next year with the end to the global restocking cycle. Still, with capacity to remain tight despite the slowdown in growth to a more sustainable pace, the MAS has to continue its tightening stance.

Facts

Manufacturing output was up by 31% y-o-y (vs. 26.8% in September), with growth slowing on a sequential basis to a still healthy 2.2% m-o-m sa (vs. 6.5% in September). This was well-above consensus of 25% y-o-y and -2.3 % m-o-m sa, but close to our more optimistic forecast of 32.3% y-o-y and 2.6% m-o-m sa.

The fast expansion was primarily driven by biomedical sector and within this sector by pharmaceuticals. Excluding biomedical output, which grew by 107.3% y-o-y (vs. 49.2% in September), manufacturing output grew by 14.2% y-o-y (vs. 20.8% in September) and declined 1.9% m-o-m sa (vs. -0.8% the previous month).

The important electronics sector pulled in the other direction, with growth decelerating to 12.9% y-o-y (vs. 28.0% in September). This was driven by slower growth for the semiconductor sub-sector and contractions for computer peripherals and infocomms & consumer electronics, partly due to the high production base last year.

Implication

The strong number was ahead of consensus and does point to a recovery in manufacturing output in Q4 following the sharp drop we saw in the Q3 GDP numbers released last week. This recovery will primarily be led by the pharmaceutical sector as it cranks up output with more production facilities now back on-stream following the scheduled shutdowns in Q3 due to changes in product mix and maintenance. However, the numbers also confirmed the expected slowdown in growth for the electronics sector, with the restocking cycle coming close to an end.

But, it is not time yet for MAS to take the foot off the brake. Inflation has been creeping up, although an important driver has been the authorities’ deliberate policy of tightening the supply of car certificates of entitlement. While the GDP “growth-dive” in Q3 has helped ease some of the emerging demand-pull inflation, the economy is already above its potential by our estimates. The tight conditions are also reflected in the very low level of unemployment and rising wages.

Given the usual monetary policy lags and the emerging demand-led price pressures, inflation is projected to remain elevated into early 2011 before receding. There are, however, upside risks to inflation from global commodity and food prices, and the broader liquidity and price impact from the capital still flowing in. Add to this, that elevated private house prices and rents are trickling down to the HDB market and will add to broader wage pressures.
 

Conclusion

This was a strong number, but largely driven by a technical bounce-back in pharmaceuticals. Manufacturing output will slow next year with the maturation of the global inventory cycle just around the corner. However, with inflation trending up and capacity tight, the MAS needs to continue the tightening stance.