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SINGAPORE: Singapore's economy has slipped into its first recession since 2002. The economy shrank at an annualised seasonally adjusted quarter-on-quarter rate of 6.3 per cent in the third quarter, after contracting by an annual 5.7 percent in the previous quarter.
The Ministry of Trade and Industry also revised its full-year growth estimate to 3 per cent, down from an earlier estimate of between 4 and 5 per cent, on Friday.
The slowdown is largely due to a contraction in the country's manufacturing sector, which is compounded by falling export demand from key markets like the United States.
As growth concerns mount, Singapore's central bank announced that it would ease monetary policy for the first time in almost five years. This move is in line with efforts by central banks across the globe, which have cut interest rates to boost growth and calm markets.
Jimmy Koh, head, Economics-Treasury Research, UOB, said: "If you look at how policy-makers are responding over the last one week – RBA cut rates, concerted interest rate cuts by central banks around the world by 50 basis points – I think that shouldn't come as a surprise. The focus is shifting from inflation to growth concerns – very extended growth concerns."
The Singdollar will now rise at a slower rate against currencies like the greenback, following the Singapore central bank's shift from a gradual appreciation bias to a neutral zero-appreciation bias. There is no change to the width or centre of the band.
"It's difficult to see Singdollar having significant strengthening at least into the first half of 2009," said Mr Koh.
Singapore's exports will now become more competitive, although it is not certain how effective this move will be in boosting flagging demand.
Mr Koh said: "It's at best a cushioning effect to make Singapore's exports cheaper amid this whole very difficult situation. But exports are more dependent on income than price effect.
"The rule of thumb is that income effect, that means global demand, is three times more important than price effect through currency adjustment."
Economists said this move is better read as a sign that the government is actively tackling growth issues, which is necessary, given the poor outlook for the region.
Alvin Liew, economist, Standard Chartered, said: "When we look at the broader picture of credit crisis, this neutral policy won't be likely to help Singapore combat this global credit crisis.
"Clearly, this is an easing policy, but as we look at the stock markets, the reaction has been focused more on both the developments overnight in the US stock market and the fact that Singapore is in a recession. To not do anything is a worse outcome.
"I think it's too early to call for a very deep recession for Southeast Asia. Certainly, growth for 2 to 3 per cent for this region is not something they are used to because when you look at the last four years, growth has averaged around 7 to 9 per cent. 3 per cent is a significant markdown... but growth is still growth."
At its last two meetings, the Monetary Authority of Singapore tightened monetary policy, allowing the Singdollar to rise faster against currencies like the greenback.
That was a move to tame inflation, which hit a 26-year high at 7.5 per cent, earlier this year. Singapore is expected to see inflation at around 6 to 7 per cent for 2008.
- CNA/so
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