As industrial output falters, no more Mr. Nice MAS

Singapore's central bank could combat weak growth tendencies with more aggressive policy.

Here's more from OSK-DMG:

Industrial production (IP) data again disappointed, declining 2.2% yoy in Aug following a revised gain of 2.5% (previously: 1.9%) in Jul and coming in way below market and our expectations of gains of 1.0% and 2.5% respectively. Excluding biomedical manufacturing, IPI declined 5.4% yoy in Aug as compared to Jul’s revised gains of 0.1% (previously a decline of 0.4% was recorded).

The poor IP performance could be attributed to electronics, which fell by 7.3% yoy in Aug from 5.3% in Jul, continuing a streak that began in Apr 2011. The weakness in electronics was broad-based with semiconductor, computer peripherals and data storage output down by 12.3%, 5.7% and 4.2% yoy respectively in Aug. The exception was infocomm/consumer electronics, which gained 13.7% yoy. Besides electronics, transport engineering output was also weak, declining 20.1% yoy in Aug, underpinned by weaker aerospace (-10%yoy) and marine/offshore engineering output (-27.2%). Beyond electronics and transport engineering, the IP picture was a little brighter. Steady gains of 13.6% yoy in pharmaceuticals helped to lift biomedical output higher 13.0% yoy in Aug, while chemicals rebounded by 6.6% yoy after three straight months of decline.

The weakness in IP data so far (Jul-Aug IP expanded by just 0.2% yoy) plus the cloudy outlook for the global environment suggested that IP is likely to remain weak for the rest of the year. This in turn suggested that manufacturing output for 3Q and 4Q could come in lower at 0.8% and 2.9% yoy than our earlier forecast of 2.4% and 4.5%.

We have also revised down our Q3 and Q4 services producing output to 1.7% and 2.4% yoy respectively from 2.1% and 3.5% previously on account of expected weaknesses in wholesale and retail trade, tourist-related activities and financial services resulting from the uncertain global situation. As a result, we have revised down our 3Q and 4Q GDP growth forecast to 1.8% and 3.2% yoy from 2.6% and 4.3% previously. For the full-year, we now expect the economy to grow by 2.0% in 2012 vs. our previous forecast of 2.6% (cf. the official forecast of 1.5-2.5%).

Given the weak growth backdrop and inflation that is above its historic average (government forecast: 4-4.5% vs. OSK: 4.3%), we think that MAS is likely maintain its modest and gradual appreciation stance but remove the slight increase in the slope of the policy band and widen it, bringing policy back to where it was in Oct 2011. The policy risk is that should MAS think that growth is likely to come in at the lower end of their forecast range (and there is downside to our growth outlook given the uncertain global environment), then MAS could be more aggressive with policy.