Why the Worst Is Over for Singapore's Economy

The latest growth snapshot of Singapore's economy may have painted a worrying picture, but economists point to encouraging signs in other parts of Asia which signal that the worst could be over for the tiny island state.

Why the Worst Is Over for Singapore's Economy
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Singapore's gross domestic product (GDP) in the third quarter contracted at a faster pace than initially expected, shrinking 5.9 percent in the third quarter from the previous quarter, the government said on Friday, worse than its earlier flash estimate of a 1.5 percent contraction.

On a year-on-year basis, the economy grew 0.3 percent from the same period last year, slower than the advance estimate of 1.3 percent and economists' forecasts of 0.9 percent.

The set of numbers prompted the government to reduce its outlook for GDP this year which it now expects to grow at around 1.5 percent, down from a previous forecast of 1.5-2.5 per cent.

However, the third quarter numbers could be as bad as it get for Singapore, according to economists, who expect exports for the trade-sensitive nation to pick up in the final quarter of the year, as seen in recent data.

"Recent signs of bottoming in exports growth in bellwether countries such as Korea, Taiwan, and crucially China, are encouraging. We have seen some early signs of this in the (Singapore) non-oil domestic exports data for October, and chances are more will come through into the year-end," Vishnu Varathan, senior economist with Mizuho Corporate Bank in Singapore said.

Non-oil domestic exports rose 7.9 percent in October from a year earlier, the government said, far better than the forecast of 3.1 percent in a Reuters poll. This reinforces the view that exports from trade powerhouses in the region are stabilizing after declining for most of the year.

In October, Chinese exports hit a five-month high, rising close to 12 percent year on year, while Korean shipments posted their first annual gain in four months. Orders for Taiwan's exports also returned to growth in September after six straight months of declines.

If exports continue to recover, Singapore's GDP could pick up more strongly in the fourth quarter, Varathan said.

"We expect that fourth-quarter growth could actually pick up a bit more strongly, with full year growth printing around 1.7-1.8 percent," he added.

Singapore's trade-dependent economy is very sensitive to external demand because exports make up more than 200 percent of its GDP, making it one of the most vulnerable economies in the event of a global slowdown.

Earlier this year, a possible disaster triggered by a Greek exit from the euro zone sparked concerns that Singapore would be tipped into a "major trade shock", with the fallout similar to that of the 2008-9 financial crisis.

(Read more: Singapore Under Recession Threat If Greece Exits Euro)

So far, the economy has managed to avert a recession, and according to Richard Jerram, chief economist with Bank of Singapore, while the third-quarter numbers are "poor," the economy has probably bottomed in the third quarter.

"The figures are poor," he said. "To some extent, it reflects a soft international environment in the third quarter and there are signs from regional trade data that things have picked up over the past couple of months, so we can expect some improvement in the fourth quarter."

Other economists however are not as optimistic. Robert Prior-Wandesforde, economist for India and Southeast Asia, said he expects Singapore's exports to be weak in the final few months of the year. While he said shipments from the likes of Taiwan and Korea have picked up, it remains to be seen if this recovery is sustainable.

"The Singapore economy continues to struggle in the context of a still subdued external environment," he said in a note on Friday. "We certainly cannot rule out a second consecutive quarter of GDP contraction. The trouble is, any improvement in the region's trade cycle will be short-lived."

Credit Suisse expects the Singapore economy to expand 1.7 percent this year, compared to growth of 4.9 percent in 2011.

By CNBC's Jean Chua.