Bareksa.com - Singapore's economy contracted in April-June for the first time in seven quarters, hit by a sharp drop in manufacturing activity, but economists said the weak reading was unlikely to alter the outlook for the city-state's tight monetary policy.

Singapore's GDP shrank by 0.8 percent in the second quarter on a seasonally adjusted and annualised basis, the Ministry of Trade and Industry's advance estimates showed on Monday, a much weaker outcome than the median forecast of 2.5 percent growth seen in a Reuters survey.

The Singapore dollar briefly eased versus the U.S. dollar, reflecting the weaker GDP numbers. The U.S. dollar was last steady on the day at 1.2412 versus the Singapore dollar, having risen to 1.2421 at one point.

Manufacturing fell 19.4 percent in the second quarter on a quarter-on-quarter, seasonally adjusted and annualised basis, down sharply from 12.2 percent growth in the first quarter, the data showed.

Michael Wan, an economist at Credit Suisse, said the plunge in manufacturing was due in part to a major electronics factory moving a substantial part of its manufacturing operations offshore in April.

The Singapore Economic Development Board has said that a one-off, firm-specific factor had dented semiconductor production in April, causing a 9.4 percent year-on-year drop that month.

Such shifts in production away from Singapore could persist, given the tightening of restrictions on foreign workers, and the position of Singapore manufacturers on the low end of the value-added chain, from where they have struggled to take advantage of demand for sophisticated smartphones and tablets.

The last time Singapore's GDP contracted in the seasonally adjusted annualised quarter-on-quarter advance estimates was in the third quarter of 2012, when GDP shrank 3.6 percent.

The government expects Singapore's economy to grow 2-4 percent in 2014 after expanding by 3.9 percent last year, and economists have generally tipped full-year 2014 growth to come in near the upper end of the official forecast.

A survey by the Monetary Authority of Singapore published in June showed that the median forecast of 23 economists surveyed by MAS was for the city-state's GDP to expand 3.8 percent in 2014.

"Chances are people are going to lower growth estimates for the year," said Song Seng Wun, an economist for CIMB, adding that market expectations for full-year 2014 growth may be trimmed to around 3 percent to 3.5 percent.

Still, the MAS will probably stick to its current policy settings at its next policy review in October "unless obviously we have a significant down-shift in the global growth environment," Song said.

Domestic policies and restructuring are likely to put upward pressure on domestic inflation, and keeping inflation expectations at bay will likely remain the priority, he added.

At its last policy decision in April, the MAS maintained its tight monetary policy stance of allowing a "modest and gradual" appreciation of the Singapore dollar.

It said core inflation will be "elevated" as a recovery in advanced economies spurs a rebound in the city-state, and due to wage pressures from a tight labour market.

Despite the plunge in manufacturing activity in the second quarter, economists said Singapore's economy was likely to be supported in the second half by an expected improvement in growth among major overseas economies.

"We're still comfortable with our 3.5 percent full-year growth forecast," said Daniel Wilson, an economist for ANZ in Singapore.

"We're expecting sequential growth to pick up into the latter half of the year, and that will largely be due to some firming of the G3 demand," Wilson added.

Recent economic indicators have shown signs of weakness in the city-state's economy. Manufacturing output contracted at its worst annual pace in 11 months in May, while non-oil domestic exports unexpectedly fell that month on weak shipments of electronics and pharmaceuticals to key markets. (Source : Reuters)