SINGAPORE'S export-dependent economy may narrowly escape a recession in the third quarter, but the deepening financial crisis should prompt the central bank to ease monetary policy to avoid a sharper economic slowdown.

A Reuters poll of 12 economists forecast a median 1.1 per cent growth in gross domestic product on an annualised, seasonally adjusted basis for the three months to end-September, after a 6 per cent contraction in the second quarter.

A recession is usually defined as two consecutive quarters of economic contractions. The global market meltdown has so far pushed New Zealand into a recession, and Japan is teetering on the brink of one.

Economists polled expect Singapore's central bank, the Monetary Authority of Singapore (MAS), to loosen monetary policy by letting the local dollar appreciate at a slower pace.

The central bank sets policy by managing the Singapore dollar in a secret trade-weighted band against a basket of currencies, instead of setting interest rates.

'The outlook is bad. Things are not good, but they are not quite as weak as in the second quarter,' said Mr Matthew Hildebrandt, an economist at JPMorgan.

He said more electronic goods were produced in the first two months of the third quarter compared with the whole of the second quarter.

From a year earlier, the median forecast of 14 economists was for GDP to grow 1.3 per cent. Forecasts for the poll were collected last week.

Mr Hildebrandt said output from the shipbuilding and chemical manufacturing sectors may drop in the months ahead as the global economy slows and oil prices fall, while the weakness in factory output may drag on the services sector as well.

The slowing economy will give the central bank - which tightened policy at its last two policy review meetings - room to ease policy, given inflation has cooled from a 26-year peak of 7.5 per cent in June.

Slight upward crawl
The central bank has held a stance of a modest, gradual appreciation of the Singapore dollar since April 2004 before it moved the band upwards in April 2008 to tame rising prices.

To loosen policy, the central bank can widen the band within which the Singapore dollar trades, shift the band downwards, reduce the slope of the local currency's appreciation path, or switch to a neutral stance.

A neutral stance means MAS will keep the value of the Singapore dollar stable against the basket of currencies.

Ten of the 13 economists forecast the central bank will probably choose to reduce the steepness of the slope, rather than switch to a neutral stance, because inflation is still a risk.

'It is more likely that the MAS would lessen the pace of appreciation but still leave the policy band in a slight upward crawl...given still persistent inflationary pressures,' Goldman Sachs said in a research note.

Central banks in China, Taiwan, Australia and New Zealand have eased policy recently amid the intensifying market turbulence from the global credit crisis.

Singapore's trade ministry and the central bank will release third quarter economic performance and the monetary policy statement on Friday, Oct 10, at 8am. -- REUTERS