Manufacturers beware: Singapore’s industrial production faces sharp slowdown in 2H14

The electronics sector will continue its downward slide.

The country’s industrial production (IP) defied consensus expectations by inching up 0.4% in the first half of the year. But the second half of 2014 may bring bad news to the country’s manufacturing industry.

According to a report by UOB, the weak electronics manufacturing sector will continue to drag Singapore’s IP in 2H14.

“Singapore’s manufacturing output growth in the second half of this year will remain trying, in part due to the high base effects in 2H 2013 as well as the weaker electronics output. Additionally, domestic supply-side constraints such as the tight labour market will continue to exert upward pressures on business costs and manufacturers may continue to face compressed profit margins.” noted the report.

Here’s more from UOB:

Singapore’s Industrial Production (IP) rose by a small 0.4% y/y (-0.1% m/m SA) rate in the month of June, reversing the 2.5% y/y decline (the first contraction since Jun 2013) a month ago. Consensus was expecting a contraction of 0.9% y/y.

 Singapore’s electronics manufacturing industry continued the third consecutive month of contraction (-4.8% y/y) in June, with the semiconductor cluster posting a third consecutive month of decline of 3.0% y/y.

This continued the “firm-specific factor” impact that was first mentioned in the EDB’s April report where it would have a negative impact on the y/y semiconductor growth in the coming months due to a higher base of comparison. Although the electronics cluster expanded 2.3% y/y in 1H 2014, we think that the expected weakness in 2H 2014 will continue to pull the average growth lower for the full year.

Year-to-date, Singapore’s IP grew 5.5% y/y, particularly as we started the year on the back of a strong 1Q where growth registered 9.9% y/y. Then in 2Q 2014, the 4.8% y/y contraction in the electronics cluster caused overall IP to grow by a much slower rate of 1.5% y/y.

Nevertheless, we continue to see bright spots in the growth prospects of the biomedical and chemicals manufacturing clusters as external demand remains strong and labour productivity growth in these clusters are expected to be higher.

We maintain our full year IP growth forecast of 3.5% due to the headwinds facing the manufacturing industry and note that plugging the latest IP number will see us maintaining our full year GDP growth forecast of 3.5%.