Singapore's central bank effectively devalued the city state’s currency as the Government warned that the global economic crisis would bring the worst economic plunge on record. Singapore’s unprecedented economic contraction between January and March was described by analysts as “horrendous”. First quarter GDP shrank by 11.5 per cent compared with a year earlier, far outstripping analysts’ predictions.

But worse was the Government’s dramatic revision of GDP forecasts for the full year, said traders in Singapore dealing rooms. A previous prediction of a contraction of between 2 and 5 per cent was revised to between 6 and 9 per cent.

It was the third time forecasts have been adjusted in the past five months.

The new prediction sent economists scrambling to recalculate their outlooks for Singapore and what one told The Times were the “diminishing prospects of an early recovery”.

The Trade Ministry said that recent tentative signs of stability in, for example, the US housing market, did not yet amount to clear signs of a turnaround. The Monetary Authority of Singapore (MAS) — the central bank — said that “considerable downside risks to growth remain”.

That was one of the reasons the MAS gave for easing monetary policy for only the second time since 2003.

The Singapore dollar moves within a trade-weighted band, which is set by the MAS and whose exact formula remains a tightly guarded secret. Moving the entire band lower, as the central bank did yesterday, leads to the currency undergoing an instant devaluation. Analysts said that because the MAS had not broadened the trading band as well as lowering it, it was signaling that it would not allow the local dollar to fall too far.

Singapore’s business model has been badly mauled by the financial crisis: the industries that once drove growth so strongly – finance, shipping, pharmaceuticals and manufacturing – have all been disproportionately hit by the slump.

Song Seng Wun, an economist at the CIMB banking group, told reporters that yesterday’s GDP forecast reflected a “freefall in external demand”.

Figures released by Singapore’s trade promotion agency confirmed the misery. They showed a 17 per cent first-quarter drop in exports and further revised down the outlook for overseas shipments this year.

Analysts at Credit Suisse believe that the financial crisis may trigger an exodus of expatriate workers, reversing Singapore’s efforts to encourage immigration and establish itself as the finance hub of South East Asia.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive