Sharp 9.1% fall in June manufacturing output points to bearish H2

But here's why the Monetary Authority of Singapore is unlikely to shift policy.

In contrast to non-oil domestic exports (NODX), the industrial production index (IPI) surprised on the downside in July, falling sharply by 9.1% m-o-m (sa Consensus: -4.4%; Nomura: -6.2%). Excluding biomedical output, the IPI fell by 4.2% after a 3.4% decline in June.

According to Nomura Research, the IPI has a more direct impact on GDP growth than NODX, so this is a more accurate reflection of underlying growth trends, and hence implies a very weak start to H2.

Yet, Nomura said that NODX may also be pointing to further weakness ahead: exports to major trading partners, including the EU, US and Japan, all fell in July.

"We maintain our view that the Monetary Authority of Singapore (MAS) is unlikely to shift policy at its October meeting. Despite the sharp year-on-year softening in CPI, inflation at 4% is unlikely to fall within the MAS‟s comfort zone," it said.

"In addition, the softer IPI does not necessarily show the economy slowing any faster than the MAS's current assessment of GDP growth this year, which still seems to be on track for the government‟s full-year target
of 1.5-2.5%, after growing by 1.7% y-o-y in H1. Against a backdrop of softer growth and lower inflation, the market has continued to price in the risk of a policy shift towards neutral. The S$NEER has fallen from a recent high of 1.52% deviation (3 August) to 0.57% last (+/-2% policy band)," it added.

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