SINGAPORE'S key manufacturing sector is still growing, but it has - for a second straight month - been expanding at a slower rate, according to a key indicator.

And output from the nation's factories is set to will weaken further - and even shrink - in the coming months, economists have predicted.

They say the outlook for manufacturing seems 'pretty dim', with a likely contraction due to an economic slowdown in the United States, Japan and Europe and this month's festive period.

The data, released on Monday by the Singapore Institute of Purchasing and Materials Management (SIPMM), is the Purchasing Managers Index (PMI), a forward-looking indicator based on a survey of purchasing executives at more than 150 companies in Singapore.

The PMI dipped 0.5 points to 50.5, last month after falling to 51 in December from 53.8 in November.

The index indicates a contraction in the sector if it is below 50, while above 50 means an expansion.

Last month was the PMI's eighth straight month of expansion.

The PMI's dip last month was due to a fall in new manufacturing and electronics, as well as new export.

Economists expect the manufacturing sector to remain weak in the first half before staging a rebound.

Government data released last month showed that factory output here slowed more than expected in December last year, setting the stage for another weak year for the sector.

Industrial output shrank by 1.7 per cent, a bigger slide than November's 0.5 per cent contraction.