The manufacturing sector is recovering, but there’s a catch

Drug production is boosting the overall figure.

Is Singapore’s struggling manufacturing sector finally out of the woods? After several quarters of sliding production, the sector churned out a surprisingly strong 23.3% quarter-on-quarter output surge in the first three months of 2016, sparking hope that the long dry spell may finally be drawing to a close.

While some analysts expect that the rosy numbers indicate a recovery for the manufacturing sector, others note that the surge isn’t as impressive as it seems.

“What was previously the key drag on the economy has now turned into the main thrust,” stated a report by DBS. “That said, this rosy performance stems mainly from a stunning 22% y-o-y surge in the biomedical cluster in the quarter. Without this boost, overall manufacturing sector would have contracted by 5.7%.”

The report further pointed out that the biomedical cluster, especially the pharmaceutical industry, is the least integrated industry within the economy.

“Quite literally, the manufacturing sector was given a strong jab in the arm from the biomedical cluster. The rest of the economy will hardly feel the effect of the surge in biomedical production - it only makes the headline GDP figure look better. Plainly, the economy would have contracted by about 2.5% q-o-q saar if not for this ‘drug effect’,” DBS noted.

UOB economist Francis Tan acknowledged that the manufacturing sector is not out of the doldrums yet, but argued that improving demand from key trading partners augur well for the sector’s recover.

“We remain optimistic that there could be some pickup in external sectors in 2H2016 as the economic conditions in the US continues on an improving path, while some basis effects from the low base in 2015 will provide some support for growth,” Tan said.

Meanwhile, OCBC economist Selena Ling added that the volatile biomedical manufacturing cluster could see a production uptick due to the introduction of new active pharmaceutical ingredients.

“At this juncture, we see little light at the end of the tunnel for regional demand and trade growth. NODX is likely to continue to drag its feet for the rest of 2016 as caution weighs on external consumption,” Ling said.