Speed bumps: Manufacturing sector feared to come to a halt in 2Q14

Is this a prelude to a bigger problem?

Manufacturing drove the economy’s growth in 1Q14. But the profitable sector is at risk in the second half of the year, due mostly to a decline in industrial and electronics production.

According to DBS, the manufacturing sector’s moderation will be driven mainly by unsustainable industrial production and a sharp dip in the country’s electronics output.

“Plainly, this is not a cyclical decline per se. This is structural and it cerainly raised questions with regards to the reasons for the closing down. Is this a case of “hollowing-out” in the semiconductor segment, in similar light as what we’ve seen previously in the disk drive segment? Or does this reflect a decline in Singapore’s overall attractiveness as a manufacturing hub and a dilution of the economy’s competitiveness? These are questions that require answers and only time will tell,” the report noted.

Here’s more from DBS:
First quarter GDP growth was healthy thanks to a 9.8%YoY growth in manufacturing. But the sector will slow down in the second quarter, which will bring about some moderation in GDP growth.

The first hint of that came from a lackluster showing in the April industrial production. The headline IP index fell by 4.7% MoM sa. In year-on-year terms, IP moderated to 4.6% YoY from 12.1% previously.

It pays to note that strong showings in IP over Feb-Mar14 were largely driven by a surge in pharmaceutical output (+19.4% YoY) and a sharp spike in offshore marine engineering (+45/1% YoY) due to a one-off delivery of oil bunkers. Neither are sustainable. IP eased when production in the offshore marine engineering moderated to 8.2% YoY, from 42.6% in the previous month.

In addition, the manufacturing sector also saw a sharp decline in electronics output. Production in the electronics cluster contracted by 11% YoY, on the back of a drastic 24.4% drop in the semi-conductor segment.

This is in line with our long held view that the electronics cycle has peaked and the cluster is due for some consolidation in production activity. However, the decline was more severe than expected.