Singapore's economy suffered its biggest contraction in five years in the second quarter as exports to the United States and Europe tumbled, leaving less room for the central bank to battle inflation at a 26-year high.
Singapore is the first Asian country to report quarterly GDP data and its heavy dependence on trade make the US$160-billion economy a good gauge of the impact of a slowdown in the United States and Europe on AsiaBut economists said the annualised and seasonally adjusted 6.6 per cent contraction - much stronger than the forecast 1 per cent decline - was exaggerated by a slump in volatile drugs output, and the economy should avoid slipping into recession.
'It's a slowdown, not a slump. We do not think a technical recession is likely,' said Kit Wei Zheng, an economist at Citigroup. He said drugs output should rise marginally in the July-to-September period from the second quarter.
A recession in usually defined as two consecutive quarters of contraction.
Drugs production, which accounts for about a fifth of Singapore's total factory output, is volatile due to changing production cycles when manufacturers shut factories to change from one drug to the next.
Economists say activity generated by a Formula One Grand Prix motor race, which the island hosts in September, will help support the republic's economy.
That shrinking feeling?
Drugs output fell 58 per cent and 26 per cent respectively in May and April, after it more than doubled in March.
Singapore is the first Asian country to report quarterly GDP data and its heavy dependence on trade make the US$160-billion economy a good gauge of the impact of a slowdown in the United States and Europe on Asia.
The Singapore dollar weakened on the news and was trading at 1.3591 at 0159 GMT to the US dollar, compared with 1.3588 before the data. The benchmark Straits Times Index was down 1.3 per cent.
The advance estimate, largely based on the first two months of the quarter, is the worst since the second quarter of 2003 when the economy shrank 7.8 per cent. From a year ago, the economy grew 1.9 per cent.
Given that demand in the United States, Asia's top export market is likely to weaken in coming quarters, economists said the central bank is unlikely to further tighten monetary policy at its next meeting in October, barring a spike in oil prices.
'The government is still concerned about inflation so perhaps it will adjust the rate of appreciation of the Singapore dollar a little higher, but there probably isn't a need for that,' said David Cohen, an economist at Action Economics.
Rollercoaster
Singapore's central bank conducts monetary policy by managing the Singapore dollar within a secret trading band against a basket of currencies instead of setting interest rates.
It tightened policy at its last meeting in April to tame inflation which reached a 26-year high of 7.5 per cent in May.
Volatility in Singapore's drugs output has helped set off sharp swings in the overall economy, which shrank 4.8 per cent in the final quarter of 2007 before surging 15.6 per cent in the first quarter, aided by a recovery in the drugs sector.
The trade ministry said that while the electronics output fell due to weaker foreign demand, other industries such as transport engineering and chemicals continued to grow.
Asian economies, many of which rely on exports, are bracing for a slowdown this year, with healthy growth in the region's powerhouses such as China offering less of a cushion than earlier anticipated.
Singapore saw exports drop in May at its sharpest rate in more than two years. Shipments to Europe and the United States - which make up a third of all exports sold - were the hardest hit, but exports to other major markets, including China also fell. -- REUTERS
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