SINGAPORE (Sept 27): Economists are scaling back their forecasts for 2019, after Singapore’s industrial output fell 8% year-on-year – the worst performance since December 2015.

On a seasonally adjusted monthly basis, industrial output shrank 7.5% on a seasonally adjusted monthly basis, the Economic Development Board said in a statement on Thursday.

See: Singapore's factory output plunges as trade war pain deepens

This effectively diminished hopes of a recovery for the sector, especially after July’s manufacturing output contracted marginally by 0.4%, beating Bloomberg analysts’ forecasts of 5.8%.

Notably, the fall in industrial production was spearheaded by a 24.4% plunge in electronics, as semiconductor output fell 30.4% month-on-month to hit the lowest level since 2012. This erased the 30.1% spike in July following tit-for-tat tariffs between US and China.

Precision engineering contracted 13.6% as precision modules fell to negative growth following lower production of optical products and metal precision components.

To make matters worse, it is also the manufacturing sector’s fourth consecutive month in the red, amplifying concerns about a potential technical recession.

In response to the bleak sector, experts are now moderating their forecasts on the industrial production index (IPI) for 2019, noting that the sector is unlikely to recover anytime soon. This comes despite improvements in certain segments, such as the transport engineering and biomedical clusters, which recorded growths of 0.5% and 10.6% respectively for the month.

“For the semiconductor segment, global sales volumes have started to pick up, providing a potential for a rebound. However, the weak global demand may keep growth in other clusters capped,” say economists from RHB Group Research.

The brokerage has also flagged the purchasing managers’ index (PMI) reading of 49.9 for August, which edged up from 49.8 previously. A reading above 50 denotes expansion in the sector, while a reading below 50 indicates contraction.

“This points towards a lesser contraction in industrial growth ahead but still within contraction territory,” says RHB. “On top of the global slowdown, the electronics cluster continues to remain battered by the industry’s down-cycle, with growth of the semiconductor segment at record lows.”

In light of the issues that could continue to put a dampener on the sector, RHB has shaved 4 percentage points off its IPI growth forecast for 2019 to -5% from -1% previously.

CGS-CIMB Research analyst Michelle Chia agrees. She says the headline reading of an 8% decline would have been worse if not for the higher output from pharmaceutical drugs, which provided “a shot in the arm” for the manufacturing industry.

However, CGS-CIMB remains bullish on the export sector’s ability to pick up, especially with governmental efforts.

Chia anticipates that external headwinds will continue to depress the state’s growth outlook, which could, in turn, prompt the Monetary Authority of Singapore (MAS) into easing monetary policy sometime in October during its policy review. This, according to Chia, is “likely to deliver some relief to the struggling export sector”.

CGS-CIMB forecasts a subdued 0.5% GDP growth for 2019F, which will put pressure on the inflation environment. The research house also expects that inflation rate for 2019F will come in at 1.0%.

“A more competitive currency would help the economy absorb the external shocks. We expect the MAS to reduce the slope of the [Singapore Dollar] nominal effective exchange rate (S$NEER) appreciation while keeping the width and centre of the policy band unchanged at its policy review in October,” says Chia.