Singapore cut its 2011 growth forecast Friday and warned the economy may slow further next year, prompting the city-state to slow the appreciation of its currency to protect exports.
Gross domestic product will likely expand about 5 percent this year, less than the government's previous forecast of growth between 5 percent and 6 percent, the Trade and Industry Ministry said.
The central bank, known as the Monetary Authority of Singapore, warned that Singapore's economy could grow less than 3 percent next year as global demand for the country's exports weakens. Singapore's dependence on exports for growth is among the highest of any nation in Asia.
"The outlook for the global economy has deteriorated sharply against the backdrop of increased uncertainty in financial markets," the bank said. "With the weak external environment likely to persist, the Singapore economy will expand more slowly in 2012."
With growth slowing and inflation pressures expected to ease, the central bank said it would slow the appreciation of the Singapore dollar.
The move will likely slow the currency's gains to 1 percent to 2 percent per year from a previous 3 percent, said Kun Lung Wu, an analyst with Credit Suisse.
Singapore uses its currency rather than interest rates to influence its economy.
The central bank, which had tightened monetary policy at its three previous biannual meetings to help slow price rises, said it expects the inflation rate to fall to 5 percent in December and between 2.5 percent and 3.5 percent next year. Inflation was 5.7 percent in August, the highest in almost three years.
In recent months, most Asian policymakers have stopped hiking interest rates and some have cut lending costs as concern shifted to slowing economic growth from quickening inflation. Earlier this week, Indonesia unexpectedly lowered its benchmark interest rate.
The city-state narrowly avoided a recession in the third quarter. The economy grew an annualized 1.3 percent in the third quarter from the previous quarter after contracting 6.3 percent in the April to June period, the ministry said.
Singapore, an island nation of 5.2 million people, relies on manufacturing, finance and tourism, and is vulnerable to shocks to global demand. The economy soared 14.5 percent last year as output in the volatile pharmaceutical sector surged.
"We expect a rough patch ahead for the economy," DBS bank said in a report. "Even if the economy managed to avert a recession in the third quarter, the risk of it falling back into the red in the fourth quarter cannot be ruled out."
The third quarter economic data is preliminary and is compiled mostly from July and August statistics, said the ministry, which is scheduled to release complete figures next month.
Compared with a year earlier, the economy grew 5.9 percent in the third quarter after expanding 1 percent in the second quarter and 9.3 percent in the first, the ministry said. Manufacturing jumped 13.2 percent in the July to September period while services grew 3.6 percent and construction inched 0.4 percent higher, the ministry said.