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Singapore Suffers Worst Contraction in 5 Years

Singapore's economy suffered its steepest decline in five years in the in the second quarter, down an annualized, seasonally adjusted rate of 6.6 percent -- much stronger than economists had expected.

Economists had forecast the economy to shrink about 1 percent in the quarter, hurt by a slump in pharmaceutical production and electronics manufacturing.

Singapore is the first Asian country to report quarterly GDP data and its heavy dependence on trade make the $160-billion economy a good gauge of the impact of a slowdown in the United States and Europe on Asia.

"The drag was almost entirely due to drugs, but we are most likely to see a rebound in drugs in the third quarter and that should pull the GDP number up," said Song Seng Wun, an economist at CIMB. "We have cut out full-year growth forecast to 4.6 percent from 5.7 percent."

The Singapore dollar weakened on the news and was trading at 1.3616 to the U.S. dollar after the data, compared with 1.3588 before.

Song said he expected no change in Singapore's monetary policy at the next review in October because the contraction was caused by undershooting of the biomedical sector and a change in policy would not help.

The advance estimate is largely based on the first two months of the quarter.

"The electronics cluster also registered some decline, mainly because of weakening foreign demand. However, other industries such as transport engineering and chemicals continued to grow," the trade ministry said in a statement.

That Shrinking Feeling?

Despite the bleak reading, the worst since the second quarter of 2003 when the economy shrank 7.8 percent, economists expect Singapore to avoid a recession -- usually defined as two consecutive quarters of contraction.

They said activity generated by a Formula One Grand Prix motor race, which the island hosts in September, will help.

Economies across the world, already strained by the credit crunch, have been further hit by high energy and food prices, which are hurting corporate profits and consumer demand and driving inflation to multi-year highs.

Asian economies, many of which rely on exports, are bracing for slower growth this year, with healthy growth in the region's powerhouses such as China offering less of a cushion than originally anticipated.

South Korea cut its 2008 growth forecast earlier this month to 4.6 percent, the slowest pace since 2005, citing soaring commodity prices and weaker exports.

Singapore saw exports drop in May at its sharpest rate in 2-½ 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.

In an annual comparison the economy grew 1.9 percent in the second quarter, slower than a 3.1 percent forecast in a Reuters poll and slowing from 6.9 percent in the first quarter.

The economy expanded at a seasonally adjusted and annualized rate of 15.6 percent in the first quarter, bouncing from a 4.8 percent dip in the final three months of 2007.