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Singapore's Economy Shrinks, Exports to Weaken

Singapore's economy contracted at a annualized rate of 6 percent in the second quarter after
seasonal adjustments, and the government now expects key exports to shrink this year as a global downturn bites.

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CNBC.com

The GDP figure was in line with a Reuters poll of economists, and better than an advance official estimate of a 6.6 percent contraction issued four weeks ago.

The government said on Monday it expects full year growth at the lower end of a 4-5 percent forecast, as it sees the city-state's non-oil domestic exports shrinking 2-4 percent this year without any pickup in major economies anytime soon.

"We have a lower non-oil export projection which is now a contraction. Combine that with the global growth slowdown and the buyback of the U.S. dollar versus the majors, there is going to be near-term downside risk for the Sing dollar," said Emmanuel Ng, currency strategist at Singapore's OCBC bank.

From a year earlier, the city-state's economy expanded 2.1 percent in the second quarter, compared with an advance estimate of 1.9 percent. The Reuters poll forecast growth of 2.1 percent.

Construction grew 17.4 percent year-on-year and the financial sector grew 10.2 percent in the second quarter, but manufacturing shrank 5.2 percent.

Manufacturing, which accounts for about a quarter of Singapore's economy, is expected to slow, reflecting weakness in demand in the United States and Europe.

Economists said demand in emerging markets, which was largely resilient through the first year of the global credit crisis, was now also weakening on high energy and food prices.

This deals another blow to Asian exports because analysts had counted on healthy demand in emerging markets to offset weakness in the West.

On Friday Prime Minister Lee Hsien Loong revised down Singapore's growth forecast to 4-5 percent for 2008, from 4-6 percent earlier.

Singapore's heavy dependence on trade makes the $160 billion economy a good gauge of the impact of a slowdown in the United States and Europe on Asia.

"The balance of risk is shifting away from inflation toward growth as seen from the correction of the Singapore dollar last week," said Kit Wei Zheng, economist at Citigroup.

The Singapore dollar strengthened slightly on the news and was trading at 1.4043 to the U.S. dollar in the Asian session Monday, compared with 1.4097 late on Friday. The benchmark Straits Times Index ended Friday's session nearly 1 percent lower.

Given that demand in the United States, Asia's top export market is likely to weaken in coming quarters, economists believe it is unlikely that the central bank will further tighten monetary policy at its next meeting in October, barring a spike in oil prices.

It tightened policy at its last meeting in April to tame inflation which reached a 26-year in June.