Singapore's economy shrinks in Q2, exports seen down

There was talk that the weaken US economy months ago, are not likely to affect Singapore's economy too much. The US economy has been facing a slow down since late 2007 and has not shown signs of improvement.

Reuters - Monday, August 11
Singapore's economy contracted in the second quarter and the government forecasts exports to fall this year for the first time since 2001, a sign that sagging growth is becoming a bigger worry for Asia than inflation.

The government on Monday forecast non-oil domestic exports would fall 2-4 percent in 2008, against an earlier estimate of 2-4 percent growth, and predicted the economy would grow at a lower end of a weaker 4-5 percent forecast.

In the second quarter, the economy contracted at a annualised rate of 6 percent after seasonal adjustments, its worst performance in five years and in line with market expectations. Year-on-year the economy grew 2.1 percent.

(For a graphic of GDP data, click on: https://customers.reuters.com/d/graphics/SG_GDPQ0808.gif)

Singapore's heavy dependence on trade makes the $160 billion economy a good gauge of how the global slowdown is affecting Asia. Non-oil domestic exports to the United States fell 21 percent in the second quarter, while shipments to European Union dropped by 12 percent.

The Singapore dollar, the central bank's main policy tool, slumped to a near six-month low around S$1.41 to the U.S. dollar.

"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, an economist at Citigroup.

NO RECESSION
Like many Asian countries, Singapore has been grappling with inflation even as economic growth slows. But officials suggested on Monday that inflation may have peaked and said -- while not expecting at technical recession -- that there will be no quick turnaround in global growth.

"The macroeconomic dynamics will remain fluid over the next 12 to 18 months. It is too early to tell what 2009 will bring," Ravi Menon, a permanent secretary at the trade ministry, told reporters.

"Current indications are that global economic growth will not see a quick turnaround."
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 economic activity, is expected to slow, reflecting weak U.S. and European demand.

Given that, economists said it was unlikely that the central bank will further tighten monetary policy at its next meeting in October, barring a spike in oil prices.

"We believe our policy remains appropriate," said Ong Chong Tee, managing director of central bank the Monetary Authority of Singapore.

The central bank steers monetary policy by managing the Singapore dollar's nominal effective exchange rate -- its relative value compared with a basket of currencies of trading partners -- rather than by adjusting interest rates. The trading band and the currencies in the basket are kept secret.

The bank moved the centre of the band up in April, its most aggressive policy change since the 2003 SARS epidemic, to tame inflation that reached a 26-year high in June. (Additional reporting by Saeed Azhar and Charmian Kok, editing by Neil Chatterjee and Tomasz Janowski)