Manufacturing contraction year-to-date could see improvement in 2H2023: RHB

Bryan Wu
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Economist Barnabas Gan has kept his industrial production growth forecast at 0% to 2%, with the balance of risks to the downside.

Singapore’s manufacturing sector could see an improvement in the second half of 2023, despite its disappointing performance in the first four months of the year, according to RHB Bank Singapore senior economist Barnabas Gan.

In line with Gan’s outlook for Singapore’s overall gross domestic product (GDP) to stage an uptick in 2H2023, he notes that the performance of advanced economies has been relatively resilient, thus translating to the return of global risk appetite and improving momentum in externally-related economic data across most of Asean, benefitting externally-dependent sectors such as manufacturing.

“Still, y-o-y manufacturing performance is expected to contract for the remaining part of 1H2023 before staging a gradual uptick in 2H2023,” he says.

For the month of April, industrial production (IP) contracted 6.9% y-o-y, missing Gan’s forecast of a gentler 3.0% y-o-y decline, and Bloomberg’s estimate of a 4.5% y-o-y contraction. This was due in part to volatile components in the manufacturing basket, he explains.

According to the economist, the main drag came from biomedical manufacturing, which recorded an 11.1% y-o-y slump, on the back of slower and volatile pharmaceutical output, which dropped by 14.1% y-o-y in April.

“Moreover, the recent business expectation survey of the manufacturing sector highlighted that business sentiments remain ‘slightly positive’ on the back of China’s reopening and easing supply chain congestion,” he adds.

Notably, Gan says that y-o-y output declines in most sectors aside from transport engineering suggest that Singapore’s externally-facing prognosis remains weak against the previous year.

In April, IP output was led solely by the transport engineering cluster, which improved 14.5% y-o-y, offsetting the decline of the chemicals, general manufacturing, precision engineering, electronics and biomedical manufacturing clusters, which recorded y-o-y contractions of between 6.2% and 11.1%.

He has kept his full-year IP growth forecast unchanged at 0% to 2%, with the balance of risks “tilted to surprise” on the downside. “The weakness in Singapore’s IP reinforces our view that the services sector will underpin overall growth,” says Gan.

Year-to-date (ytd), the economist notes that tourism-related indicators have supported Singapore’s growth prognosis in 2H2023, following the uptick in inbound arrivals and recovering hospitality-related sectors such as food & beverage, retail, hospitality and transport.

“However, a downgrade in Singapore’s IP activity, should incoming data disappoint further, will negatively impact Singapore’s overall GDP growth in 2023,” he adds.

Overall, Gan has kept his Singapore GDP growth forecast for 2023 at 2.0%, with recovery momentum likely to be observed in 2H23.

Noting the weaker performance in external-oriented sectors including manufacturing, wholesale trade, water transport and finance and insurance, Maybank Economics Research analysts Chua Hak Bin and Lee Ju ye say that this will likely offset the resilience in construction and tourism-related sectors such as accommodation, air transport, and food services.

Trade promotion agency Enterprise Singapore cut its 2023 non-oil domestic exports (NODX) forecast significantly to a contraction of 10% to 8%, from its previous estimates of a 0.2% to 0% decline, due to the poorer than expected performance in 4M2023 and the persistent manufacturing downcycle.

The Maybank analysts believe that Singapore could slip into a technical recession — defined as two consecutive quarterly contractions — if the boost from China’s reopening fails to materialise in 2Q2023.

They have maintained their GDP growth forecast for 2023 at 0.8%, near the lower bound of the Ministry of Trade and Industry’s (MTI) forecast range of 0.5% to 2.5%. The MTI expects 2023 GDP growth to come in at around the “midpoint” of its forecast range.

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