(BN) Singapore’s Economy Contracts Less Than Initially Estimated

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Singapore's economy shrank less than initially estimated last quarter as pharmaceutical output countered declining electronics manufacturing, even as the faltering outlook led the government to cut growth forecasts.

Gross domestic product fell an annualized 0.7 percent in the second quarter from the previous three months, when it expanded a revised 9.5 percent, the Trade Ministry said in a statement today. That compares with a July preliminary estimate of a 1.1 percent contraction and the median prediction of a 0.5 percent gain in a Bloomberg News survey of 11 economists.

The Singapore government this week trimmed its prediction for 2012 growth to 1.5 percent to 2.5 percent, from an earlier forecast for an expansion of as much as 3 percent. Policy makers across the world are girding for a deeper slowdown from Europe's sovereign-debt turmoil, with Asian central banks from China to South Korea and the Philippines cutting interest rates last month, putting pressure on Singapore to ease monetary policy.

"There is some risk of a technical recession," said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. "With GDP probably weaker than the central bank's expectations in April, there's room to calibrate monetary policy settings but this is a close call. It very much depends on growth and inflation data in the third quarter."

The island's currency was little changed at S$1.2448 per U.S. dollar as of 9:06 a.m. local time, after rising as much as 0.2 percent earlier. It has gained more than 4 percent this year, the second-best performer among the 11 most-traded Asian currencies tracked by Bloomberg.

Export Gains

Non-oil domestic exports will probably rise 4 percent to 5 percent in 2012, the trade promotion agency said in a statement today, from a previous projection for shipments to grow 3 percent to 5 percent.

The central bank said in April it would allow faster gains in its currency to damp price pressures, diverging from most other regional economies that had left borrowing costs unchanged or eased monetary policy. Inflation has accelerated, fueled by rising housing and private transportation costs.

Singapore's monetary policy stance is appropriate "as it stands now," central bank Deputy Managing Director Ong Chong Tee told reporters in a briefing in the city state today. Consumer- price gains will ease in the second half, he said. The island isn't likely to experience a technical recession in the third quarter, Ow Foong Pheng, an official at the Trade Ministry, said at the same briefing.

Outlook 'Choppy'

"The second half will be choppy for Singapore as the U.S. faces fiscal headwinds, Europe's recession deepens, and China slows down," Chua Hak Bin, an economist in Singapore at Bank of America Corp.'s Merrill Lynch division, said before the report. "Domestic demand is sufficient to keep the economy afloat and Singapore will avoid going into a recession but given the growth risks, we think the central bank could normalize and ease" its monetary policy stance, he said.

The monetary authority last month estimated consumer-price gains will average 4 percent to 4.5 percent this year, compared with the 3.5 percent to 4.5 percent range it forecast previously.

Singapore guides the local dollar against a basket of currencies within an undisclosed band and adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band. The Monetary Authority of Singapore releases its next policy review in October.

Manufacturing Expansion

The economy expanded 2 percent from a year earlier, faster than a July estimate of 1.9 percent and lower than the median forecast of 2.2 percent in a Bloomberg survey.

Temasek Holdings Pte, the state-owned investment company, said last month profit declined 16 percent in the fiscal year through March as contributions from units fell amid the global slowdown.

Manufacturing grew 4.5 percent last quarter from a year earlier, more than the preliminary estimate of 3 percent. Construction grew a revised 5.3 percent, while services climbed a revised 0.8 percent.

Singapore's growth may fall below 1 percent should the U.S. and Chinese economies slump and the European crisis worsen significantly, the central bank said July 25. The island, located at the southern end of the 600-mile (965-kilometer) Malacca Strait and home to one of the busiest container ports, remains vulnerable to fluctuations in overseas orders even as the government boosts financial services and tourism.

"There continues to be uncertainties and downside risks," the Trade Ministry said in a statement today. "Global economic conditions are expected to remain subdued in the second half of the year. Given the macroeconomic backdrop, the growth outlook for the Singapore economy remains cautious."