Singapore PMI hit two-year high in June but pullback likely in Q3

20130704-bt-sg-pmi-hit-2-yr-high-but-q3-pullback-likely-pic [SINGAPORE] The Republic's manufacturing sector continued to buck the regional trend of faltering factory activity last month, as the purchasing managers' index (PMI) rose to a two-year high.

But economists say that the details are more telling of what is to come: the sub-indices tracking new domestic and export orders have slipped, which is why some of them now think that a pullback in manufacturing output is likely in the current quarter, Q3.

Singapore's PMI reading rose to 51.7 last month from 51.1 in May, edging away from the 50-point threshold separating growth from contraction.

The PMI figures came yesterday from the Singapore Institute of Purchasing & Materials Management (SIPMM), which surveys purchasing executives in more than 150 companies to compile the index.

The improved showing last month stands in contrast to PMIs elsewhere in Asia, released by Markit earlier this week:

China's PMI fell further into contraction territory to 48.2 last month, signalling a deterioration in manufacturing conditions; South Korea's slipped below 50 for the first time since January, and Taiwan's rose to 49.5, but still signalled a manufacturing contraction.

Singapore's PMI has now been above 50 for four months running, bolstering the view that "manufacturing activity is on the road to recovery, although it's a slow one", said UOB economist Francis Tan.

This may also point to stronger second-quarter GDP growth, for which advance estimates will be released next week, said DBS economist Irvin Seah.

But the global outlook looks dicey, he added. "The US recovery remains mixed, while Europe is still in recession; China is going through internal consolidation, which could spill over to the rest of Asia. Indeed, the PMIs from some of our key trading partners are already reflecting that."

There are "tell-tale signs" in Singapore's latest set of PMI readings of this.

Barclays economist Joey Chew pointed, for example, to the fall in new domestic and export orders for both the overall and electronics PMIs, which dovetails with the sluggish demand from the major economies.

Meanwhile, both the production and inventory gauges continued to rise, a situation OCBC economist Selena Ling described as "disconcerting".

She said: "This potentially heralds an oversupply solution building up in Q3, especially if the pre-Christmas orders fail to impress."

Ms Chew thus believes Singapore should prepare for a pullback in manufacturing production in Q3.

A drop in new orders was one reason why the PMI specific to Singapore's key electronics sector slid to 51.2, although this still means the sector has been in expansion territory for five months in a row.

Diving again into the details, Ms Chew said she was "quite heartened" to see that the electronics production sub-index stayed in contraction last month; it was because businesses had been accumulating inventory and although production fell in May, new orders did too, so inventories were not depleted.

"We need external demand to pick up more, or else production may stay in contraction in the next couple of months," she said.

But UOB's Mr Tan said the 2.1 point drop in electronics new orders could have been due to the spate of negative news on weak growth indicators and the cash crunch coming out of China, a key export destination for Singapore's producers.

He said: "However, since the liquidity condition in China is more stable now, there's not much concern. In the second half of this year, China is still on a steady growth path and should support Singapore's electronics recovery still."

Source: Business Times, 4 Jul 2013