SHRINKING SINGAPORE

Singapore, one of the world's most open economies, fittingly expects to be one of its fastest sinking. After a ghastly first quarter the government forecasts full-year shrinkage of between 6 and 9 per cent.

What to do? By “recentring” the policy band that pegs the Singapore dollar to an (undivulged) basket of currencies, the Monetary Authority of Singapore gains a pitifully modest devaluation – estimated by analysts at about 1-2.5 per cent. MAS was careful to attach some suitably tough language, in effect putting currency traders on notice that more aggressive action will not follow. In truth, there is not much more Singapore can do. Sharper depreciation may help exporters, but any gains would be modest so long as global demand is in hibernation. Meanwhile, a weak currency would encourage capital flight, the Asian leitmotif of global risk aversion. Net capital outflows for the region as a whole were $145bn in the second half of 2008, according to the World Bank, or more than net inflows in the whole of 2007.

The city state has few other tools at its disposal. It has already pushed the boat out on fiscal stimulus, where it is among Asia's biggest spenders with a $13.7bn package worth about 8 per cent of gross domestic product. The breakdown of first-quarter output illustrates the difficulty of stimulating demand in an island of under 5m people. Swooning external demand resulted in the manufacturing sector falling 29 per cent, almost treble the contraction in the fourth quarter of 2008. Construction bucked the trend, up 26 per cent, due in part to a strong pipeline of housing projects. But falling house prices, down 14 per cent in the first quarter according to official data, mean this offers limited comfort. Scariest of all, of course, is Singapore's role as a leading indicator for the Asian economy. Expect more downgrades to follow.