THE Government has been forced to cut its original forecast for full-year growth after the economy ended 2008 with a shocking set of figures that confirmed the tightening grip of recession.

Between October and December, the economy contracted 12.5 per cent over the previous three months - the biggest quarterly decline logged since the Ministry of Trade and Industry (MTI) started compiling these figures in 1976. Year- on-year, the economy shrank 2.6 per cent.

The nastiest surprise in yesterday's figures centred on the previously buoyant services industry, which has followed the manufacturing sector into a steep slowdown amid collapsing world trade and plunging export demand.

Accordingly, the Government has downgraded its forecast for economic growth this year to between -2 and 1 per cent, from the previous tip of between -1 and 2 per cent. But some economists think the lowered forecast is still too optimistic, given that Singapore is only at the beginning stages of the first global recession since World War II.

'It seems a tad aggressive unless we see a V-shaped recovery,' said Citigroup economist Kit Wei Zheng. 'I dare say that 1 per cent growth this year is almost impossible.'

Mr Kit has cut his own growth forecast for the year from -1.2 per cent to -2.8 per cent. This would make this year's recession the most severe in Singapore's history, beating 2001's dot.com bust when the economy shrank 2.4 per cent.

Indeed, CIMB-GK economist Song Seng Wun predicts 'a whole lot of new lows' this year, which will mark the first recession here to have both the key manufacturing and services sectors in the red.

'It's likely that we'll start the year with a contraction in the first quarter that will be the biggest year-on-year decline since independence,' said Mr Song.

'Judging by how much the economic outlook has plunged in the last few weeks, we are going into territory which we haven't seen before.'

In the worst-case scenario, Mr Song thinks the economy could shrink by 2 to 5 per cent this year, while unemployment could return to the 5 per cent peak it reached in 2003.

But there is one encouraging aspect. While the numbers suggest this recession will be the worst ever, companies and households are better prepared to handle a downturn now than during the Asian financial crisis, said Mr Song.

'We are heading into the worst recession ever but with the strongest balance sheets ever,' he said. 'Households are not as heavily indebted now, and the Government is also much wealthier.'

In the aftermath of the Asian financial crisis in 1998 and the dot.com bust in 2001, there was 'a lot of fear', added Mr Song.

Unemployment touched just under 4 per cent, and 'there were many sad stories of business failures and everyone knew someone who had lost his job'.

So far, Singaporeans are not feeling the same kind of fear and panic, but that does not mean the ride will be a smooth one.

Singapore's manufacturing sector shrank by 9 per cent in the fourth quarter over the previous year, mainly due to plummeting demand for electronics products in developed economies and a sharp drop in the output of precision engineering, said the MTI yesterday.

But the bigger shock was in the services industries, which registered almost flat growth of 1.1 per cent in the quarter, down from a 5.3 per cent expansion in the third quarter. Wholesale trade, transport and storage, and financial services bore the brunt of the slowdown.

The sharper-than-expected decline in services growth is significant for the broader economy, given that the commerce and transport sectors make up more than a quarter of GDP, said Barclays economist Leong Wai Ho.

Growth in construction, the third pillar of the economy, remained in the double digits, but fell to 13.3 per cent from 18.6 per cent in the previous quarter.

This sector is the only one that can receive a direct boost from the Government, which has indicated that it may bring forward some building projects it had postponed.

'The speed of the growth deceleration in the fourth quarter last year is somewhat disconcerting for construction and especially services, which does portend a growing risk that their 2009 forecasts may need to be revised downwards,' said OCBC economist Selena Ling. For now, her full-year growth forecast remains unchanged at -0.8 per cent.

fiochan@sph.com.sg