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SINGAPORE'S path to recovery took an unexpected turn with poor production figures for last month.
Output contracted 9.3 per cent compared with June last year, much worse than the 6.4 per cent economists had expected. It also reversed the expansions recorded in April and May.
The volatile pharmaceutical sector was largely to blame - both for the unexpected surge in April and May and the sharp drop last month.
If biomedicals, which include drugs and medical technology products, were excluded, factory output fell 14.1 per cent last month, moderating further from the 15.9 per cent drop in May, according to Economic Development Board (EDB) figures released yesterday.
Factory output fell 9.2 per cent seasonally adjusted from May to June, after falling just 1.8 per cent in May from April.
Economists said the economy, which has emerged from a technical recession, is still on a gradual path to recovery.
'We knew pharma would pull back after a few months of strong gains. But notwithstanding that, underlying manufacturing is still on the improvement trail,' said Mr Song Seng Wun, an economist at CIMB-GK.
Mr Song said there could be a downward adjustment to the gross domestic product (GDP) figures because of manufacturing, although this could be offset by upward revisions in the services sector.
'The net effect is still that Singapore has come out of recession,' he said.
Singapore emerged from a technical recession in emphatic fashion, with advanced estimates showing that the economy likely grew 20.4 per cent in the second quarter from the first, on the back of an expansion in manufacturing in April and May.
The Government revised its GDP forecast for the year from a contraction of 6-9 per cent to 4-6 per cent but warned that a recovery would be subdued, as gains in sectors like pharma may not be sustained.
Indeed, pharma grew 14 per cent last month from the year before as more drug ingredients were produced, but this was much lower than the 139 per cent growth racked up in May and April's 78 per cent expansion.
Electronics production fell 20.4 per cent, in line with declines in the previous two months, as global demand for items like mobile phones and iPods remains weak.
Other key sectors like chemicals and precision engineering continued to show moderation in their pace of decline, economists said, although transport engineering fell at a faster rate, from 9.2 per cent in May to 12.4 per cent last month. It has now declined for two straight months after previously being in expansion.
Barclays Capital economist Leong Wai Ho, who described the pharma performance as a 'one-off blip', said: 'It is getting harder to get too bearish on manufacturing activity in Singapore in the second half this year.'
He cited examples such as chip giant Samsung Electronics reporting its highest quarterly net profit in over two years on the back of Chinese demand.
And purchasing manager indexes from the region, which are forward-looking readings of factory activity, are also looking up.
'All this points to a more lasting bounce in industrial activity in Singapore in the months of the third quarter,' said Mr Leong.
But CIMB-GK's Mr Song said the real test for a sustained recovery in manufacturing will come towards the end of the year when businesses start to plan how much to order for the festive season and whether there will be a need to ramp up hiring.
'Orders appear to be holding up, but businesses are still not in a great rush to hire, so the consumption for the year-end festive months could be disappointing for sales and production.'
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