Singapore’s government faces its biggest test since taking office in 2004 after forecasting that the economy will shrink 1-2 per cent next year.
The prediction followed weaker than expected third-quarter gross domestic product figures.
Official data said the city-state’s GDP contracted 0.6 per cent year-on-year in the three months to September compared with an initial estimate of a 0.5% decline.
A recession next year would be the fourth that Singapore has suffered since independence in 1965 but some economists believe it could be the country’s worst. The sudden downturn may prompt the government to call an early election before scheduled polls in 2011 in case economic pain leads to a backlash against the People’s Action party that has ruled Singapore for 50 years.
The economic slowdown threatens to widen Singapore’s large income gap between the rich and poor. The government of Lee Hsien Loong, the prime minister might also come under criticism for investments in western financial groups that have turned sour.
The Government of Singapore Investment Corp, which manages foreign reserves, has invested in UBS and Citigroup in the past year. Temasek, the state investment company, took a stake in Merrill Lynch.
Mr Lee and his father, Lee Kuan Yew, Singapore’s independence leader, head GIC, while the premier’s wife is in charge of Temasek. The severity of the downturn could determine the continued durability of the Singapore model, seen as a pioneer of authoritarian capitalism, in which the public gives up some civil liberties in return for economic prosperity.
Song Seng Wen, an economist at CIMB-GK, a local brokerage, said Singapore could see its GDP shrink 3-5 per cent annually over the next few years.