SINGAPORE'S economy faces an 'exceptionally uncertain' environment and may shrink next year for the first time since 2001, the Ministry of Trade and Industry (MTI) warned yesterday.

It confirmed that the economy is now in a technical recession, after final economic growth numbers for the third quarter came in yesterday slightly worse than forecast. A technical recession is two straight quarters of quarter-on-quarter contraction.

Services growth slowed more sharply than anticipated in the third quarter and manufacturing registered its biggest decline since 2001, causing the economy to shrink 0.6 per cent over the previous year and 6.8 per cent from the second quarter.

This prompted MTI to cut its expectations for full-year growth for the fourth time. It is now tipping an expansion of only 2.5 per cent, down from the revised 3 per cent it projected just last month.

The slowdown, already hitting almost all sectors, will intensify next year, with many key sectors - from financial services and electronics to property and tourism - expected to see 'weak or no growth', said MTI Permanent Secretary Peter Ong.

He said the economy could contract by as much as 1 per cent next year or grow by up to 2 per cent, depending on the depth and length of the recession. This forecast range of three percentage points is wider than the Government's usual two percentage point bracket, and underlines the 'considerable uncertainty' of the economic outlook, he added.

On the bright side, this year's growth forecast implies that the Government still expects the economy to grow in the fourth quarter, by about 1.4 per cent to 1.6 per cent over the same period last year, said economists.

This could lift Singapore out of a technical recession.

But some were sceptical about this projection, saying that the dismal export figures last month could be an early indicator of a gloomy Christmas.

Non-oil domestic exports lodged their steepest monthly fall in more than six years, and are expected to drop between 5 per cent and 7 per cent for the full year.

'Gross domestic product growth in the fourth quarter is likely to sink further into negative territory, if October exports data is anything to go by, and given that more regional economies including Japan and Hong Kong have also sunk into a recession,' said OCBC economist Selena Ling.

Concerned about 'the rate at which services are decelerating', she expects the economy to shrink by 1.5 per cent in the fourth quarter over the previous year.

Indeed, weakness in the services sector was what pushed third-quarter growth figures below the forecast, said Citigroup economist Kit Wei Zheng. Hotels, restaurants, financial services and trade were among the segments that performed worse than expected.

But construction provided a surprise boost in the quarter, with growth coming in at 12.8 per cent, up from the 7.8 per cent forecast earlier.

If drug manufacturers can obtain product approvals and deliver an anticipated rebound at year-end, it could push economic growth into positive territory in the fourth quarter, suggested HSBC economist Robert Prior-Wandesforde.

The pharmaceuticals industry, which operates on its own production cycle largely independent of global ups and downs, is also one of Singapore's best hopes for a buffer against the downturn next year, said MTI's Mr Ong.

'We expect a number of new pharmaceutical and chemical plants to come on stream later this year and in 2009, which will provide some degree of buffer in manufacturing.'

He added that Singapore has a 'strong pipeline' of investments in industries such as electronics, biomedical sciences and chemicals, which will come online within the next two years and boost mid-term growth.

The Economic Development Board also said yesterday it is on track to meet its investment forecasts this year. But it 'is not discounting the possibility that some projects would be affected' by the worldwide recession, although there have been no 'major' ones affected so far.

fiochan@sph.com.sg