Singapore's manufacturing PMI slipped to 49.7

Post-Christmas season eased demand.

According to DBS, PMIs (Dec13) have disappointed on both cyclical and structural issues. Headline overall manufacturing PMI was down 1.1pts to 49.7.

This indicates the first contraction in this series since February last year. Electronics PMI was also down to 50.1, from 51.2 in the previous month.

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While there are concerns that the external demand may not be as strong as previously anticipated, we prefer to think of it as the earlier optimism had run ahead of fundamentals. Demand is picking up in the region. But it hasn’t been as strong for local manufacturers.

Moreover, the dip in the PMIs is more likely to be driven by the post-Christmas season moderation in demand and forthcoming Chinese New Year lull. A more sustained improvement will only materialise from February onwards.

So will it drag down the GDP growth figures for 4Q13? Perhaps. But manufacturing was never meant to be the sector providing the upside surprise. Focus should be on the services sector. This is the larger engine for the economy and short term prospects remain good. Tourism related services and trade related services are likely to do well amid the pick-up in regional outlook.

So why is manufacturing sector underperforming the services sector as well as against the regional peers? The answer is quite simple. The sector is losing its competitiveness amid the transition drag from the restructuring exercise. Rapid increase in underlying cost structure has taken the toll on companies’ margins and abilities to compete effectively.

While the services sector is also under such cost pressure, it is relatively more sheltered from external competition. In contrast, the manufacturing sector has been bearing the brunt of rising regional competition for many years and some clusters are already facing severe hollowing-out. Restructuring added more salt to wounds.

This has been an issues highlighted several times over the past years. And the effect of this restructuring drag will continue to be manifested in the coming years. As the process approaches its halfway mark, perhaps it is time to reassess the direction to take going forward.