June 26 (Bloomberg) -- Singapore's manufacturing grew in May at less than half the pace expected by economists as pharmaceutical production held near the same level as a year earlier and output at disk-drive makers dropped further.

Manufacturing, which accounts for a quarter of Singapore's $118 billion economy, increased a seasonally adjusted 2.5 percent from April, when it fell a revised 11.6 percent, the Economic Development Board said in a report today. That was less than the median forecast of a 7 percent gain in a Bloomberg News survey of seven economists. From a year earlier, production grew 10.6 percent in May.

Singapore's factory output tends to fluctuate from month to month because of swings in production by drugmakers that shut plants for cleaning before making different chemicals. A slowdown in manufacturing and exports may make it more difficult for the economy to beat the growth rate seen in the first quarter and meet the government's expansion target of as much as 7 percent this year.

``Disk-drive production is a sunset industry as manufacturers continue to consolidate their bases here,'' said Leslie Khoo, an economist at Forecast Singapore Pte. ``Exports and industrial production numbers show second-quarter growth is not likely to surpass the first quarter. Still, it will hold its own compared with a year ago.''

Southeast Asia's fourth-largest economy expanded an annualized 6.8 percent in the first quarter from the fourth, prompting the government on May 17 to raise its 2006 growth forecast for the second time this year. From a year earlier, the economy expanded 10.6 percent, the most in seven quarters.

Computer Chips

Singapore's benchmark Straits Times Index, which has gained 0.9 percent this year, climbed 24.91, or 1.1 percent, to 2367.94 at the 5.05 p.m. local time close. The Singapore dollar fell about 0.1 percent to S$1.6007 against its U.S. counterpart at 5:45 p.m. local time.

Electronics output grew 8.6 percent in May from a year earlier, following a revised gain of 9 percent in April. Electronics account for about 36 percent of Singapore's manufacturing and drugs make up over 16 percent.

Computer chips gained 38.9 percent in May from a year ago, after a revised 39 percent increase in April.

Chartered, whose chips power Microsoft Corp.'s Xbox 360 game console, on June 6 kept its forecasts for a second-quarter profit and gain in sales. Worldwide microchip sales may rise 9.8 percent this year, more than previously forecast, as demand increases for computers and mobile phones, the San Jose, California-based Semiconductor Industry Association said June 7.

Disk Drives

Gains in the island's semiconductor output are offsetting declining production of disk drives. Output of storage devices has dropped as makers of the products move to lower-cost sites. Disk-drive exports fell 33.5 percent in May.

Production of disk drives fell 37.6 percent from a year earlier, after a 30.4 percent decline in April.

``Disk-drive manufacturers are competing against lower-cost countries such as China and the cost efficiencies are just not there,'' said Joseph Tan, an economist at Standard Chartered Bank in Singapore. ``Pharmaceuticals are still a volatile swing factor. It's normal at this stage of the cycle to see some moderation of activity as the numbers have been very good.''

Pharmaceuticals output gained 1.1 percent in May from a year ago, after declining 33.9 percent in April.

Excluding pharmaceuticals and medical devices, production rose 12.7 percent in May from a year earlier, following a revised gain of 9 percent in April.

Oil Rigs, Ships

Singapore's transport and marine engineering industry, which accounts for 10 percent of manufacturing, is benefiting from crude oil prices near record highs. Builders of oil rigs and ships have won billions of dollars of contracts. Keppel Corp., the world's largest maker of shallow-water oil rigs, has enough orders to keep its shipyards busy until 2010.

Singapore's transport engineering output increased 35.5 percent from a year ago after climbing a revised 23.6 percent in April, as marine and offshore engineering production increased 34.8 percent.

``Shipyards continued to construct ships for delivery in a few months' time,'' today's report said. ``The rig fabricators were also very active in their fabrication of offshore rigs. Increased exploration activities created more demand for oilfield equipment, especially from the Middle East and U.S.''

To contact the reporter on this story: Shamim Adam in Singapore sadam2@bloomberg.net

Last Updated: June 26, 2006 05:51 EDT