The surprise move by the Monetary Authority of Singapore (MAS) yesterday to halt the appreciation of the Singdollar has underscored the bleak outlook for the economy, which is showing signs of stagnation.
The MAS set the rate of the dollar's appreciation to zero per cent, catching out traders.
The Singdollar slumped the most since August, weakening as much as 1.2 per cent against the US dollar to S$1.3667.
It also dragged down other Asian currencies, as investors worried that the MAS' move might trigger a currency war, with various governments depreciating their currencies to keep their exports competitive.
The MAS last flattened the rate of the Singdollar's appreciation to zero per cent in 2001 during the dot.com bust, and again in 2008 during the global financial crisis.
Mizuho senior economist Vishnu Varathan said: "A flattening is not done lightly. While we are not staring down the barrel of a gun, it could be that the MAS sees the economy as being in a 'slow burn' recession."
Indeed, the decision came as flash estimates from the Ministry of Trade and Industry (MTI) showed that the economy expanded 1.8 per cent in the first quarter compared with the same period a year ago, but grew zero per cent when compared with the previous quarter. In its policy statement, the MAS said the future does not look much better, as the outlook for the global economy has dimmed since its last policy review in October.
It estimated that weakening investment and exports will weigh on the US economy, while the euro zone and Japan will be dragged down by strengthening currencies and weak export demand. China's growth is also likely to moderate.
In this context, a relatively weaker currency could make Singapore's exports more attractive to its major trading partners that face subdued growth.
The MTI's flash numbers showed that manufacturing continued to be the main drag in the first quarter, contracting 2 per cent in the three months to March 31 from a year earlier.
Some lift to the local economy came from construction, which expanded 6.2 per cent, and services, which grew 1.9 per cent.
But DBS economist Irvin Seah said the data shows the services sector is losing steam, as it grew just 3.8 per cent compared with the previous quarter, down from a more robust 7.7 per cent between the third and final quarters of last year.
"Historically, if this sector turns, the economy turns along with it. A downward revision of the headline GDP (gross domestic product) growth should not be discounted."