"Current conditions suggest that the U.S. will likely enter a mild recession in the first half," the Ministry of Trade and Industry said in a statement. "The key uncertainty is over the length and severity of this slowdown."
The economy shrank in the fourth quarter because manufacturing dropped by 25 percent compared with the previous quarter, hurt by a 28 percent plunge in pharmaceutical output.
The overall contraction was greater than the advance estimate of 3.2 percent and the 3.4 percent forecast in a Reuters poll.
"It is reasonable to assume that the world economic growth will slow this year, leading to slower growth in Singapore. The cut in the official growth forecast is in line with our annual
forecast of 5 percent economic growth this year," said David Cohen, an economist at Action Economics.
No Recession Here
Singapore is one of the first Asian countries to report economic data and its fourth quarter performance will unnerve rival Asian exporters, already worried that the United States is sinking into recession.
However, Singapore does not itself expect to sink into recession, defined as two consecutive quarterly declines in GDP, as it thinks Asian economies will remain relatively robust.
"Most of the simulations we have done do not show that outcome," said Ravi Menon, second permanent secretary at the Ministry of Trade and Industry.
Surveys indicated that manufacturers remained fairly upbeat, with sectors such as rig-building enjoying a long pipeline of orders, government officials said.
Song Seng Wun, an economist at Malaysian bank CIMB, said there was a risk of Singapore slipping into recession if the U.S. weakness spread, but he added: "Manufacturing is under a bit of a cloud, but for this year it may still hold up."
Inflation is likely to be pushed up by higher food and oil prices, but an official at the central bank, the the Monetary Authority of Singapore (MAS), said monetary policy did not need to be changed.
The MAS uses the currency as its main monetary tool and its current policy is to allow a gradual, modest appreciation in the Singapore dollar. The currency hit a one-week low after the data before steadying around 1.4183/95 per U.S. dollar.
From a year earlier, the city-state's economy expanded by 5.4 percent in the fourth quarter, compared with an advance estimate of 6.0 percent.
Manufacturing expanded just 0.2 percent in the fourth quarter from a year earlier, while construction grew 24.3 percent. The financial services sector grew 15.9 percent.
Singapore's growth is fueled by manufacturing of goods such as electronics, pharmaceuticals and oil rigs, although tourism, financial services and construction are increasingly important.