May factory output grows a surprise 2%

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MAY factory output grew 2 per cent, confounding consensus expectations of a
decline and marking a second month of year-on-year growth. April's revised 0.4
per cent growth in production was the first expansion after six months of
decline.

On a seasonally adjusted month-on-month basis, manufacturing
output fell 1.6 per cent in May, after April's 25.9 per cent increase, data
released yesterday by the Economic Development Board shows.

Economists
are cautiously upbeat, saying that although the volatile pharmaceutical sector
was - again - the key driver of industrial production in May, signs of slowing
output declines in other clusters are persisting.

Leong Wai Ho of
Barclays Capital said: 'The gradual trend of recovery in the electronics
cluster is still intact, powered by the semiconductor segment.

'Signs
are also emerging that the recovery has started to broaden from electronics
into the chemicals and precision engineering clusters.'

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The
biomedical manufacturing cluster expanded 120.4 per cent year on year in May,
thanks to a 138.6 per cent leap in pharmaceutical output. Plants switched to
producing higher-value patented drug compounds after US approvals came through
in April, and the rise was also boosted by a low base in May last year.

Excluding biomedical manufacturing, output contracted 17.7 per cent from May
2008, and a seasonally adjusted 0.5 per cent from April.

Sectors in
which the pace of production decline moderated in May included chemicals,
precision engineering and general manufacturing.

And while the
electronics sector's 22.3 per cent year-on-year fall in output was greater than
April's 21.8 per cent, it was significantly milder than Q1's 38 per cent
drop.

Transport engineering's production, which tends to be lumpy, also
fell 8.1 per cent from a year back.

Citi economist Kit Wei Zheng
believes April and May's industrial production numbers could 'impute a further
statistical lift to the year-on-year GDP numbers' and expects the advance
second-quarter GDP growth estimates to come in at close to minus 4 per cent,
compared with Q1's 10.1 per cent decline.

Barclays' Mr Leong now expects
a 'more lasting bounce in industrial activity in Singapore' with 'additional
support from the opening of three biologics (vaccine) plants and Shell's US$3
billion petrochemical cracker between Q3 2009 and Q1 2010'.

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