Wednesday, 6 May 2015

S'pore's PMI falls for 5th straight month

Gloomy data dampens hopes of recovery in second half of year
By Chia Yan Min, The Straits Times, 5 May 2015

THE tough times show no sign of letting up for manufacturers, going by the dismal numbers out yesterday.

The Purchasing Managers' Index (PMI) - an early indicator of factory activity - fell again last month, the fifth straight month of decline. The latest reading of 49.4 follows a score of 49.6 in March. A reading above 50 indicates growth.

Manufacturing has been hit hard by ongoing restructuring, rising business costs and the strength of the Singapore dollar, which has made exports more expensive.

These factors were reflected in last month's PMI, which pointed to a decline in both domestic and export orders amid tepid global demand. Manufacturers' production, inventory and stocks of finished goods also declined, the data showed.

In particular, the running down in stocks of finished goods implies "cooling expectations among manufacturers", said DBS economist Irvin Seah, who does not expect the sector's outlook to improve significantly in the coming months.

This was reaffirmed by a decline in companies' order backlog in the latest data, which was compiled by the Singapore Institute of Purchasing and Materials Management from a survey of more than 150 firms.

"This hints at significantly weaker demand and will dent hopes of a recovery in the second half of the year," Mr Seah added.

The PMI for the electronics cluster, which makes up a third of the manufacturing sector, sank to 49.1 last month after coming in at 50.1 in March.

This was the result of declines in new domestic and export orders, production, finished goods and imports.

The latest data indicates that the electronics PMI's brief foray into expansionary territory in March was unsustainable and the industry is "still stuck in this one-step forward, one-step back pattern", said OCBC economist Selena Ling.

Last month's PMI underlines how the sector seems stuck in low gear. Manufacturing, which makes up a fifth of Singapore's economy, has shrunk 2.5 per cent since the start of the year and was the main drag on economic growth in the first quarter.

It was a similarly gloomy story elsewhere in the region. China's official PMI came in at 50.1, the weakest April reading since the series started in 2005.

South Korea's PMI fell to a six-month low of 48.8 last month on the back of poor export data, while Taiwan's number fell to a 21-month low of 49.2, from 51 the month before. Even though India's reading was in positive territory, at 51.3 last month versus 52.1 for March, it still means growth is slowing.

A slower Chinese economy is "having a very significant impact on the growth outlook for Asia", said Mr Seah. "This has been a challenging year, and we don't think things will improve significantly even in the second half."

PMI falls across Asia: What is this economic index and why is it so closely watched?
By Ann Williams, The Straits Times, 5 May 2015

The tough times show no sign of letting up for manufacturers in Singapore and across Asia going by dismal PMI numbers out on Monday.

The Purchasing Managers' Index for Singapore fell again in April, the fifth straight month of decline. China's official PMI recorded its weakest April reading since the series started in 2005. South Korea's PMI fell to a six-month low in April while Taiwan's PMI number for the month hit a 21-month low.

But what is this PMI and why does it matter?

What is the PMI?

The PMI is an indicator of business activity - both in the manufacturing and services sectors. It is a survey-based measures that asks the respondents - purchasing managers of private-sector fims - about changes in some key business variables from the month before. It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

How is the PMI derived?

From a series of qualitative questions. Executives from a reasonably big sample, running into hundreds of firms, are asked whether key indicators such as output, new orders, business expectations and employment were up/down/same as the month before.

A key feature of the PMI surveys is that they ask only for factual information. They are not surveys of opinions, intentions or expectations and the data therefore represent the closest one can get to "hard data" without asking for actual figures from companies.

Respondents are asked to take expected seasonal influences into account when considering their replies. They are also asked to provide a reason for any change on the previous month, if known.

How does one read the PMI?

A figure above 50 denotes expansion in business activity. Anything below 50 denotes contraction. Higher the difference from this mid-point, the greater the expansion or contraction. The rate of expansion can also be judged by comparing the PMI with that of the previous month's data. If the figure is higher than the previous month's then the economy is expanding at a faster rate. If it is lower than the previous month then it is growing at a lower rate.

What are its implications for the economy?

The PMI is usually released at the start of the month, much before most of the official data on industrial output, manufacturing and GDP growth becomes available. It is, therefore, considered a good leading indicator of economic activity.

Economists consider the manufacturing growth measured by the PMI as a good indicator of industrial output, for which official statistics are released later. Many economists will adjust their GDP estimates after reading the PMI report.

Central banks of many countries also use the index to help make decisions on interest rates.

What does it mean for financial markets?

The PMI also gives an indication of corporate earnings and is closely watched by stock investors as well as the bond markets. A good reading enhances the attractiveness of an economy vis-a- vis another competing economy.

Who produces the PMI?

The two main producers are Markit Group, which conducts PMIs for over 30 countries worldwide, and the Institute for Supply Management (ISM), which conducts PMIs for the US.

Other similar purchasing managers indices are produced by the IFO in Germany, The Bank of Japan in Japan (tankan), the official China PMI by the country's National Bureau of Statistics, and the Swedish PMI run by private bank Swedbank.

In Singapore, the index is compiled by the Singapore Institute of Purchasing & Materials Management.

Sources: Economic Times, Investopedia

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