Singapore factory activity contracts for first time in over 2.5 years amid global growth fears

A technician working at the Rolls-Royce engine rotor assembly facility in Singapore on March 18, 2019.
A technician working at the Rolls-Royce engine rotor assembly facility in Singapore on March 18, 2019.PHOTO: AFP

SINGAPORE - Manufacturing growth fell again in May to log its first contraction in more than two and a half years, as trade tensions between the United States and China heated up further last month.

In an extension of a growth slowdown since early 2018, Singapore's Purchasing Managers' Index (PMI), a key barometer of activity in the manufacturing industry, slipped 0.4 point to 49.9 last month from April - dipping below 50 for the first time since August 2016.

A reading above 50 indicates that the manufacturing economy is expanding, while one below 50 shows a general decline. Before May, the overall PMI had already declined for 12 out of the last 15 months.

The electronics sector PMI saw its seventh consecutive month of contraction, dipping 0.1 point to 49.4.

ING chief economist Robert Carnell saw two factors behind the decline, one of them being the US-China trade war, which is damaging growth prospects in China and by extension, Chinese demand for manufactured goods made in Singapore.

The other, he said, is the global slump in technology demand and the associated technology war between the US and China.

Looking ahead, CMC market analyst Margaret Yang expected new orders and exports to likely remain weak in the months to come, as additional tariffs between the US and China kicked in around end-May to early June. Last month, the US more than doubled tariffs on on US$200 billion worth of Chinese goods, prompting Chinese retaliation of tariffs on US$60 billion in trade.

"Anecdotal evidences suggest that manufacturers are increasingly concerned about the escalation of trade tensions between the world's two largest economies," the Singapore Institute of Purchasing and Materials Management (SIPMM), which compiles the PMI index by surveying around 150 industrial firms, said in its report on Monday (June 3).

 
 
 
 

SIPMM added that the weak reading overall was due to slower growth recorded in new orders, new exports, factory output, inventory and the employment level.

The order backlog index continued to contract for the eighth consecutive month as well.

For electronics, the latest figure was attributed to weaker readings in new orders, new exports and the employment level as well.

Observers noted the continued downward trajectory of manufacturing activity here, with global demand cooling and heightened trade frictions.

"The figure is in line with a broad slowdown in manufacturing activities across the globe as cyclical slowdown deepens on the rise of detrimental trade tariffs," said Ms Yang.

She added that with the trade tariffs, higher import and input prices are "likely to inhibit profit margins, and higher prices will eventually be transferred to end users".

But Mr Carnell noted the Singapore PMI fell less than that for Malaysia and South Korea.

On the outlook for the rest of the year, he said: "The environment can remain very weak, at least until there is some thawing in the trade war."

He added that while US President Donald Trump is hard to predict, he will likely have to consider the impact of the trade war on his chances of re-election, mainly through its negative effect on the stock market.

"With the election race maybe not kicking off in earnest until early next year, this leaves plenty of room for negativity in the meantime," he said.

While the global tech slump comes with an added complication that replacement electronics are being postponed until the roll-out of 5G technology, he said this could be a "real game changer" for the industry, the Asian region and tech hubs like Singapore when it happens.