News analysis

Challenges persist despite positive manufacturing data

An outstanding performance by the manufacturing sector in the fourth quarter certainly gave economists a reason to cheer on the first working day of the year.

The sector, which makes up a fifth of Singapore's economy, had been staging a slow and gradual recovery in the second half of last year.

But according to advance estimates from the Trade and Industry Ministry out yesterday, it suddenly accelerated in the fourth quarter, surging 6.5 per cent from the same period a year earlier.

At the same time, Singapore's Purchasing Managers' Index - an indicator of manufacturing activity - showed factory activity grew for a fourth straight month in December, after more than a year of contraction.

Still, nobody is popping the champagne. Indeed, the consensus among analysts seems to be: Don't get used to these happy surprises just yet.

Credit Suisse economist Michael Wan noted that the big surge in manufacturing in the fourth quarter largely came from electronics and the notoriously volatile biomedical cluster. "Some of the boost in electronics reflected the ramp-up of (US semiconductor firm) Micron Technology's new facility here last year, which is mostly done, so it is unlikely we will see the same kind of increase this year," he said.

 

A bigger worry is the fact that there is no knowing how a Donald Trump presidency in the United States will affect the economy and, more specifically, manufacturing.

Mr Wan said that the US President-elect has made some political appointments that signal he is looking to bring more manufacturing activity back to the US, which could have indirect effects on Singapore. If Mr Trump's policies were to lead to big US manufacturers pulling out from the region, this would not only affect manufacturing activity here, but also be a dampener on the business and professional services sector.

And even as it chugs along, manufacturing's recovery could very well be overshadowed by the weakness in the service sector, which makes up two-thirds of the economy. While the sector grew 0.6 per cent in the fourth quarter from a year ago, slow global growth and poor sentiment will likely weigh on areas such as wholesale trade, finance and insurance, and business and professional services.

ANZ economist Ng Weiwen said that the US Federal Reserve's continued policy of gradually raising interest rates will also have a dampening effect here. "In Singapore, domestic interest rates are poised to increase, posing a significant headwind to economic activity. Juxtaposed against slower employment growth and elevated layoffs, domestic activity will remain subdued."

Yesterday's numbers are a bright spark in what could turn out to be a sombre 2017.

A version of this article appeared in the print edition of The Straits Times on January 04, 2017, with the headline 'Challenges persist despite positive manufacturing data'. Print Edition | Subscribe