Singapore closed its worst year of economic performance on an optimistic note with the economy shrinking less than expected.

Gross domestic product (GDP) contracted by 5.8 per cent last year amid disruptions from the pandemic, noted Ministry of Trade and Industry (MTI) advance estimates yesterday.

The full-year growth is an improvement on the MTI's earlier forecast of a contraction of 6.5 per cent to 6 per cent made last November and much lower than its previous estimate of a 7 per cent to 5 per cent shrinkage.

While the recession wreaked havoc across a broad swathe of the economy and wiped out thousands of jobs, Singapore's success in containing the spread of Covid-19 and the subsequent lifting of mobility restrictions in the final two quarters helped alleviate the growth slump.

If reaffirmed next month, when MTI releases its next economic survey report, the record downturn would be less than the minus 6 per cent that most private forecasters, including those at DBS Bank and OCBC Bank, had expected.

The economy shrank by 3.8 per cent year on year in the final three months of 2020 after a revised 5.6 per cent drop in the third quarter, as more coronavirus-related curbs on economic activities were lifted.

Gross domestic product contracted by 0.2 per cent in the first quarter and by a historic 13.4 per cent in the second quarter.

MTI's fourth-quarter estimate is more positive than the median forecast of a 4.5 per cent year-on-year drop by economists in a Reuters poll.

Mr Jeff Ng, senior treasury strategist at HL Bank, said the better-than-expected fourth-quarter performance reflects Singapore's success in containing Covid-19 cases, which in turn enabled economic activity to improve from the previous quarter.

The economy grew 2.1 per cent on a quarter-on-quarter seasonally adjusted basis, following the 9.5 per cent expansion in the third quarter.

This was bolstered by the phased resumption of activities following the April-to-June circuit breaker period and the rebound in major economies during the quarter as they emerged from their lockdowns.

Despite the better-than-expected fourth-quarter and full-year performance, MTI has maintained its 2021 forecast for the economy to expand by 4 per cent to 6 per cent, helped by the low base set this year.

Still, the higher end of the 2021 estimate would make it the best year since 2011, when GDP grew by 6.3 per cent.

In fact, the economy will probably not return to pre-Covid-19 levels until the end of this year, MTI said last November.

Maybank Kim Eng analyst Chua Hak Bin said the recovery this year will be more U-shaped than V-shaped, with GDP returning to pre-pandemic levels only early next year.

"Recovery in 2021 will be conditional on services, which remains sluggish, while manufacturing has already surged strongly in 2020," added Dr Chua.

Ms Selena Ling, head of treasury research and strategy at OCBC, agreed, saying there may be some moderation in the manufacturing growth momentum in the first quarter, given that the period is traditionally slower due to the Chinese New Year holiday.

Global restocking of goods that surged in the second quarter has also started to subside, which may weigh down growth in Singapore's export-oriented manufacturing sector, she said.

Any big jump in growth numbers may transpire only in the second quarter and that, too, would be because of the very low base set in the same period of 2020, when GDP shrank by 13.4 per cent year on year, Ms Ling noted.

Analysts believe the recovery will also be uneven.

While effective vaccination will improve both business and consumer confidence, the timing of the reopening of international borders remains key to when the wholesale and retail trade, accommodation and food services and other sectors will recover, they said.

Ms Ling said the market hopes for continued fiscal support for hard-hit sectors like aviation, tourism and hospitality-related industries in the Budget due on Feb 16.

"But there may be greater recalibration of support levels in order to prioritise repositioning and rebuilding for a post-Covid environment," she added.

MTI data yesterday showed that manufacturing in the fourth quarter grew 9.5 per cent year on year, slightly less than the 10.8 per cent growth in the previous quarter.

This expansion was supported primarily by higher output in the electronics, biomedical manufacturing and precision engineering clusters, which outweighed declines in the transport engineering and general manufacturing clusters.

However, on a quarter-on-quarter seasonally adjusted basis, manufacturing contracted 2.6 per cent, a pullback from the 12.6 per cent expansion in the third quarter.

Construction shrank 28.5 per cent year on year in the fourth quarter, but this is an improvement on the 46.2 per cent contraction in the preceding quarter.

The improved performance came on the back of the resumption of more construction activity in the fourth quarter than in the third, the MTI said.

The wholesale and retail trade, transport and storage sectors shrank by 11 per cent in the fourth quarter, moderating slightly from the 11.9 per cent contraction in the previous three months.