Singapore’s Manufacturing Slows Amid Looming US Trade War Threat

Singapore’s manufacturing sector, a cornerstone of the city-state’s export-driven economy, is showing signs of strain as it braces for the potential fallout from a renewed US trade war under President Donald Trump. The purchasing managers’ index (PMI), a key indicator of factory activity, dipped by 0.2 points in January to 50.9, down from 51.1 in December, according to data released by the Singapore Institute of Purchasing and Materials Management on 3 February. While a reading above 50 still signals growth, the slowdown—coupled with broader regional trends and Trump’s recently announced tariffs on China, Canada, and Mexico—has raised concerns about the resilience of Singapore’s open economy.

The tariffs, described by OCBC Bank chief economist Selena Ling as broader in scope than those during Trump’s first term, threaten to disrupt highly integrated global supply chains, particularly in sectors like automotive and energy. For Singapore, a small but trade-dependent nation with a free trade agreement with the US, the risks are significant. “Singapore may not be immune to the risk of an escalating trade war,” Ms Ling noted, highlighting the potential for indirect impacts despite the absence of direct tariffs on the city-state.

A Regional Ripple Effect

The slowdown in Singapore mirrors a broader trend across Asia, where factory activity has decelerated in most Asean countries as well as North Asian economies like China and Taiwan. Malaysia, Thailand, and Vietnam, key manufacturing hubs in the region, are reportedly facing continued contraction in their factory sectors. Only South Korea and Indonesia have shown signs of accelerating growth, offering a glimmer of optimism amid the gloom.

Economists point to multiple factors behind the January dip in Singapore’s PMI. Beyond the looming trade war, the Chinese New Year holiday shortened working days, while manufacturers may have front-loaded production in late 2024 in anticipation of the US tariff announcements. Additionally, slower growth in major economies—China, Europe, and the US—has dampened global demand, further pressuring Singapore’s export-oriented industries.

Maybank economist Brian Lee suggested that the PMI decline could reflect a seasonal slowdown tied to the lunar holiday, but cautioned that it might also signal waning momentum from earlier production surges. “The front-loading momentum is starting to ebb,” he observed, indicating that the initial rush to beat potential tariffs may be losing steam.

Electronics, a linchpin of Singapore’s manufacturing sector, remained the primary driver of growth despite its own PMI slipping by 0.3 points to 51.1 in January. This marks the 15th consecutive month of expansion for the electronics PMI and the 17th for overall manufacturing, underscoring the sector’s enduring strength. However, most sub-indices for both overall and electronics PMIs mirrored the broader slowdown, with only the sub-index for stocks of supplier deliveries in the overall PMI slipping into contraction territory.

Conversely, stocks of input purchases and finished goods showed improvement, a trend Ms Ling described as a potential “harbinger of hoarding in anticipation of tariffs.” The contraction in supplier deliveries, she added, could foreshadow emerging supply chain disruptions—a concern amplified by the prospect of a wider trade conflict under a second Trump administration.

Diverging Economic Forecasts

Looking ahead, economists remain divided on the trajectory of Singapore’s economy in 2025. Ms Ling argued that it is “too premature” to revise OCBC’s GDP growth forecast of 2.2 per cent for the year, despite a “cloudier” external trading environment. In contrast, Maybank’s Mr Lee anticipates a moderation to 2.6 per cent growth, down from a flash estimate of 4 per cent for 2024, reflecting greater pessimism about the trade war’s impact.

Associate Professor Goh Puay Guan from the National University of Singapore’s Business School urged close monitoring of regional trade dynamics and the tangible effects of Trump’s tariffs in the coming months. “The trends to watch would be whether the recently announced tariffs have any impact, and how much of the regional trade continues to grow and adapt,” he said.

DBS Bank economist Chua Han Teng echoed the need for vigilance, warning of “medium-term challenges and downside risks” for trade-dependent Asian economies like Singapore. He highlighted the potential for intensified geopolitical tensions and a broader global trade war, which could exacerbate pressures on the region’s interconnected markets.

Singapore’s position as a global trade hub makes it particularly vulnerable to external shocks, even if it escapes direct tariffs. Its economy relies heavily on the smooth flow of goods and components through regional supply chains, many of which involve China—a primary target of Trump’s latest trade measures. While the city-state has diversified its trade partnerships and bolstered resilience through agreements like the US-Singapore Free Trade Agreement, the scale and unpredictability of the current US policy shift pose unique challenges.

The potential for supply chain disruptions is not merely speculative. If tariffs lead to higher costs or delays for raw materials and intermediate goods, Singaporean manufacturers could face squeezed margins or reduced competitiveness. Moreover, a slowdown in demand from key markets like China or the US could further dampen export growth, a critical engine for the nation’s GDP.

Yet, there are also opportunities amid the uncertainty. Singapore’s reputation for stability, innovation, and efficiency could position it as a safe haven for businesses seeking to relocate or diversify away from more directly affected regions. The government’s proactive trade policies and investments in technology—particularly in electronics and advanced manufacturing—may also help cushion the blow.

Broader Implications for Asia

The ripple effects of a US-led trade war extend far beyond Singapore. Asean economies, many of which are deeply integrated into global supply chains, face similar risks of collateral damage. Vietnam, for instance, has benefited in recent years from trade diversion as companies shifted production away from China during the first Trump administration’s tariff regime. However, a broader trade conflict could undermine these gains, particularly if global demand weakens further.

Thailand and Malaysia, already grappling with contracting factory activity, may struggle to absorb additional shocks. Both countries rely on exports of electronics and automotive components, sectors likely to be hit hard by disruptions in US-China trade. Indonesia and South Korea, while showing more robust growth, are not immune to the broader downturn in global trade sentiment.

For Singapore, the immediate focus will be on managing short-term volatility while preparing for longer-term shifts. Policymakers may need to consider targeted support for manufacturers, particularly small and medium enterprises that lack the resources to weather prolonged uncertainty. At the same time, fostering regional cooperation within Asean could help mitigate the impact of external pressures, ensuring that intra-regional trade remains a buffer against global headwinds.

As Singapore navigates this precarious moment, the January PMI dip serves as a reminder of the fragility of growth in a trade-dependent economy. While the manufacturing sector continues to expand, the pace of growth is slowing, and the spectre of a US-driven trade war looms large. Economists and policymakers alike are bracing for a range of outcomes, from manageable disruptions to more severe economic fallout if tensions escalate.

The coming months will be critical in determining whether Singapore can maintain its economic momentum or if external forces will force a recalibration of expectations. For now, the city-state stands at a crossroads, balancing its role as a global trade leader with the urgent need to adapt to an increasingly uncertain world.