SINGAPORE - A key gauge of factory activity released on Thursday (Oct 3) suggests that sentiment in the manufacturing sector is at its lowest ebb in three years and orders are shrinking.
The ongoing trade war between the United States and China appears to have hit the sector badly, analysts said, and the possibility of a technical recession has cropped up, once again. Singapore also joins several other countries where the index has plunged, suggesting that the slowdown is global.
The Purchasing Managers' Index (PMI) came in at 49.5 for last month, indicating a contraction in factory activity in September.
A reading below 50 indicates that a sector is shrinking. The PMI has now fallen for five straight months and the latest number fell sharply compared to August when it was 49.9. September's PMI is the lowest since July 2016.
"The prolonged uncertainties in the major global markets have weakened demand and increased cost pressures on local manufacturers, and are further aggravated by disruptive global supply chains," said Ms Sophia Poh, vice-president for industry engagement and development at the Singapore Institute of Purchasing and Materials Management (SIPMM), which compiles the index.
The weaker reading in September was caused by a decline in new orders and factory output, as well as faster contraction in employment and new exports, the SIPMM said.
Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said that while manufacturing weakness is already quite evident, its related effects on consumer sentiments and other services sectors are starting to come in as well.
"This may translate to some softness in the labour market ahead and is something that policymakers are probably watchful for," she said.
United Overseas Bank economist Barnabas Gan added: "A sustained contraction in Singapore's manufacturing momentum into September is likely where we think a negative growth of around 4.5 per cent year on year or more should trigger a technical recession scenario."
The new orders index of 49.8 for September - down from 50.3 the previous month - was the lowest recorded reading since it came in at 49.6 in August 2016.
Both local and external demand for new orders are weak, which is not a good sign, Ms Ling said.
"The plunge in new orders is likely to weigh on business confidence and in turn their capital expenditure, as well as hiring and wage intentions. Workers may also tighten their belts and trim discretionary spending."
The PMI for the key electronics sector saw a further decline as well - posting a reading of 49.1, down 0.3 point from the previous month and contracting for the 11th consecutive month.
This was due to faster contraction in new orders, employment and factory output.
Maybank Kim Eng senior economist Chua Hak Bin said that the decline in electronics manufacturing could be partly due to the United States' tariff hikes on some consumer electronics goods from China, which kicked in on Sept 1 and also affected Singapore.
American consumers faced with high prices on their consumer tech goods may have cut their spending in these areas, he added.
"Singapore is a key node in the Asia tech supply chain. The destruction of American consumer demand from the import tariffs will hurt and disrupt electronics manufacturing and exports," Dr Chua said.
Ms Ling added that economic growth is likely to remain very muted in the fourth quarter of this year and may extend into the first half of 2020, she added.
A separate PMI released by IHS Markit on Thursday showed "employment was reduced at the fastest pace in almost four years, which has the potential to derail consumer spending and impact the domestic economy even further", said its economist Joe Hayes. This could push Singapore into a technical recession, he added.
Around the region, factory activity surveys in China and Japan have shown similar weakness. China's official PMI remained in contraction territory in September at 49.8, while Japan posted a reading of 48.9 last month.