SINGAPORE - Singapore has become the first Asian economy to fall into recession, analysts said Friday, after the government revised downward its full-year growth estimate and eased monetary policy for the first time in years.
The Ministry of Trade and Industry lowered the city-state's full-year growth forecast to around three percent, citing a slowdown in the global economy and key domestic sectors.
The move came as the ministry released preliminary data showing that real GDP declined by 6.3 percent in the third quarter after contracting 5.7 percent in the previous quarter, the ministry said.
While it did not describe the economy as being in recession, a technical recession is generally defined as two consecutive quarters of contraction in economic output.
"Singapore will be the first Asia economy to fall into a technical recession," DBS Group Research said in an assessment of the data.
In a move to confront the downturn, the Monetary Authority of Singapore (MAS) -- its de facto central bank -- said it was easing monetary policy for the first time in more than four years.
"The Singapore economy has weakened over the course of 2008, alongside an escalation in the turmoil in financial markets and a more severe deceleration in global economic activity," MAS said.
These developments meant new uncertainties for the Singapore economy, while slower Asian growth would restrain activity in a range of service industries such as transportation and tourism, it said.
"The risks to external demand conditions continue to be on the downside, and a more severe global downturn cannot be discounted," the bank said.
The MAS conducts monetary policy through the local currency rather than by setting interest rates.
The Singapore dollar is traded against a basket of currencies of its major trading partners within an undisclosed band known as the nominal effective exchange rate (NEER).
In its semi-annual statement, MAS said it had maintained the policy of a modest and gradual appreciation of the NEER policy band since April 2004 but is shifting to zero percent appreciation.
Singapore is Southeast Asia's wealthiest economy in terms of gross domestic product (GDP) per capita but is heavily dependent on trade. This makes it sensitive to hiccups in developed economies, particularly key export markets the United States and Europe.
Economists polled by Dow Jones Newswires had forecast a 0.3 percent quarter-on-quarter rise in GDP, the value of goods and services produced in the economy.
Compared with the third quarter of last year, the ministry said Singapore's economy contracted by 0.5 percent in real terms, against 0.8 percent expansion foreseen in the Dow Jones poll.
In August the government had revised down its full-year GDP growth forecast to 4.0 to 5.0 percent but since then, external economic conditions have deteriorated more than expected, the trade ministry said.
Analysts said the key drag on third-quarter growth was manufacturing, which contracted by 11.5 percent year-on-year, and the surprise was a sharp decline in growth of what has been a booming construction sector.
Construction growth slowed to 7.8 percent from 19.8 percent, while service industries grew by 6.1 percent, marginally down from 7.0 percent in the second quarter, the data showed.
"Services deceleration should get more severe from here on," the US bank Morgan Stanley said in a report.
In a speech Friday, Prime Minister Lee Hsien Loong said that although growth is slowing, the financial system is sound and the economy remains competitive.
He said that in recent years Singapore has upgraded and diversified its economy.
"This will mean new and better jobs, even if some old ones are lost," he told a conference.
Morgan Stanley said it expects things will only get worse for Singapore, and the recession will likely be more than just a technical one.