Looking forward: The Singapore economy - Manufacturing

Slow year ahead amid sluggish demand

Home-grown packaging firm Greenpac opened Singapore’s first “green” factory in Jurong in October 2013.
Home-grown packaging firm Greenpac opened Singapore’s first “green” factory in Jurong in October 2013. PHOTO: GREENPAC

Manufacturing suffered one of its worst runs last year, and few expect the sector to be a major engine for growth this year.

The outlook remains dim, clouded by sluggish global sentiment, weak oil prices and tough domestic conditions, said analysts.

Factories are mired in the worst "manufacturing recession" since the global financial crisis, said CIMB Private Banking economist Song Seng Wun.

Manufacturing, which makes up a fifth of the Singapore economy, shrank about 5 per cent last year over levels the year before - it was the main drag on growth. Weak external demand has been a major factor, since most factory output is produced for export.

Developed markets such as the United States are recovering gradually, but this has not translated into a lift for regional exports, said Mr Song.

  • The year ahead

  • • Developed markets like the United States are gradually recovering but this has not translated into a lift for regional exports.

    • On top of external headwinds, Singapore manufacturers are being hit by domestic challenges.

    • Factories here are also affected by longer-term structural shifts in global supply chains.

"We have seen that not just in Singapore but also in China, Thailand, Japan and other Asian economies, where exports are also floundering," he said.

It is unclear when the recovery in developed markets will trickle down to factories here, he added.

Another factor is low oil prices, which have reined in utility costs for some firms but hit the bottom lines of those in the offshore and marine segment, said HSBC economist Joseph Incalcaterra.

He said this could offset structural increases in other areas such as biopharmaceutical output.

 

Singapore is a key global hub for manufacturing oil and gas equipment - it is the largest maker of jack-up rigs, commanding 70 per cent of the world market.

Besides external headwinds, firms are battling domestic challenges such as rising costs, foreign labour constraints and sliding competitiveness amid sluggish productivity growth, said OCBC economist Selena Ling.

"I've pencilled in a modest improvement for manufacturing this year, but I'm not holding my breath... I see no near-term light at the end of the tunnel," she said.

In addition to business cycle fluctuations, export-dependent sectors like manufacturing are also seeing longer-term structural shifts in global supply chains, said ANZ economist Ng Weiwen.

For instance, firms in China - Singapore's largest trading partner - are increasingly sourcing inputs from within the country.

Thus, China is no longer importing as much from the rest of Asia - a trend that has dampened regional trade, said Mr Ng.

Likewise, US growth has been powered largely by domestic consumption, not imports from Asia.

Also, many Asian factories have been holding on to inventories amid lacklustre demand, and these need to be sold before new production can begin, said Barclays economist Leong Wai Ho.

"It is a corrective cycle, complicated by the start of an interest rate hiking cycle," he noted.

All these factors point to a slow year ahead for Singapore and the rest of Asia, especially since growth in China is likely to continue moderating.

"Low oil and commodity prices will provide some support, but not enough to offset the drag from weaker external demand," added Mr Leong.

A version of this article appeared in the print edition of The Sunday Times on January 03, 2016, with the headline 'Slow year ahead amid sluggish demand'. Print Edition | Subscribe