Why analysts predict that Singapore's strong IP growth will be a one-off

Blame it on 2013's low base.

According to UOB Economic-Treasury Research, Singapore’s Industrial Production (IP) grew 12.8% y/y (6.2% m/m SA) in February, better than the 4.4% y/y growth seen a month ago.

The low base in the same month a year ago (where IP declined 15.5% y/y in Feb 2013) and a steady recovery in global demand saw IP growing at the fastest pace since Jan 2012. Ex-biomedical manufacturing, IP grew 11.2% y/y (3.8% m/m SA).

Here's more from UOB Economic-Treasury Research:

Manufacturing activity expanded across all clusters in February. Strong contributions came from the biomedical manufacturing (+19.3% y/y), electronics (14.8% y/y), precision engineering (+19.2% y/y), and transport engineering (+11.1% y/y) clusters.

With the robust growth seen in semiconductor sales (particularly in the Americas and Europe), the semiconductor manufacturing cluster grew for the 11th consecutive month and expanded 16.8% y/y, further supporting the electronics cluster.

The strong IP expansion in February was mainly due to the low base last year and we do not think that this robust growth rate can be sustained for the rest of this year.

We maintain our forecast of a 5.0% expansion (versus 1.7% growth in 2013) in Singapore’s manufacturing activity this year, implying a more moderate average monthly growth rate of 4.6% y/y in the months to come.

We continue to think that better economic growth outlook in G3 economies and the uptrend seen in manufacturing activities among Asian economies during recent months will boost manufacturers’ revenues. However, we think that there are still downside risks in the supply side of production, and with the Singapore labour market remaining tight in addition to the upcoming foreign worker levy hikes, these factors may eat into the profit margins of our manufacturers.

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