Singapore economy slows

John Jannarone
The Wall Street Journal
03 Jan 08

The economy in the fourth quarter contracted for the first time since 2003, as weakness in manufacturing outweighed a windfall from construction.

The downturn could cause a dilemma for the island’s central bank as the risk of an economic slump precludes monetary tightening even as inflation surges.

Singapore’s economy contracted 3.2% from the third quarter on a seasonally adjusted annual basis after expanding 4.4% in the July-September period, according to the Ministry of Trade and Industry’s advance estimate.

The performance compares with a 4.2% rise forecast in a Dow Jones Newswires poll of economists and marked the biggest decline since the 7.6% drop in the second quarter of 2003.

Singapore suffered from slower exports of drugs and electronics, while services and construction remained healthy.

Manufacturers may be vulnerable to softer external demand this year, but the island also faces its highest inflation rate since the early 1980s, and if the economy stumbles it may strip the central bank of its ability to combat prices with tighter policy.

“The [Monetary Authority of Singapore] probably will not do anything to monetary policy for now,” said Selena Ling, a strategist at OCBC Bank in Singapore.

Singapore’s central bank uses foreign exchange rather than interest rates to control prices because external trade dwarfs the domestic economy. Last October it said it would let the Singapore dollar appreciate at a faster pace to cap surging costs of imported food and energy.

In November, the consumer-price index rose 4.2% from a year earlier, the fastest pace since May 1982. The central bank forecasts the inflation rate this year will come in between 3.5% and 4.5%, and economists have said the bank may consider tightening again if the rate breaches that target.

Ms. Ling said the manufacturing sector could continue to struggle if the U.S. economy weakens this year, and the construction sector may not be able to pick up the slack. “Construction was very strong last year, but it may not be able to come through again,” she said.

The industrial sector was hurt mainly by weakness in the drug industry, though exports of the island’s mainstay electronics products also were weak.

Manufacturing output edged up 0.5% from a year earlier in the fourth quarter after growing 10.3% in the third quarter. The sector expanded 5.6% for all of last year.

The construction sector reflects a small percentage of the overall economy, but a wave of development projects led to a surge in output that helped offset the falloff in manufacturing. Construction output rose 24.4%, accelerating from 19.2% growth in the third quarter.

Singapore’s services sector was a key driver in the fourth quarter, led by financial institutions and tourism. Many analysts expect those industries to perform well again this year, providing a shield against an external slowdown.

“Although tempting to panic, there seems little fundamental justification to do so at this stage,” said Robert Prior-Wandesforde, an economist at HSBC in Singapore.

The services sector grew 8.3% in the fourth quarter, matching the pace of the previous quarter. For the full year, services expanded 8.1%.

Gross domestic product expanded 6% from a year earlier, falling short of the third quarter’s 9% gain and forecasts for 7.8% growth. Singapore’s economy grew 7.5% last year, compared with the prior year’s 7.9% rise.

The government expects the economy to expand between 4.5% and 6.5% this year, a forecast most economists say can be achieved.

Write to John Jannarone at

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