Singapore economy may shrink next year - PM

Singapore's economy may shrink next year, the country's prime minister said today, as the trade-dependent island is hit by a sharp drop in demand for its products and services on the back of the world economic crisis.

Singapore's economy may shrink next year, the country's prime minister said on Friday, as the trade-dependent island is hit by a sharp drop in demand for its products and services on the back of the world economic crisis.

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Lee Hsien Loong, speaking to journalists at a lunch hosted by Singapore's Foreign Correspondents Association, also said he expected unemployment to rise, particularly in the manufacturing industries, which account for about a quarter of its economy.

Lee, the son of Singapore's founding father and former Prime Minister Lee Kuan Yew, faces his biggest test since taking office four years ago.

The economy is already in recession and with major demand centres including the United States and Europe also in recession, the outlook for Singapore for next year is bleak, economists have said.

Last month, the government pledged to spend S$2.3 billion ($1.5 billion) to help firms get credit and said it would run a larger budget deficit to support an economy that it said could shrink 1 percent in 2009 and at best would expand 2 per cent.

"It makes sense for us to take advantage of that," he said.

The government plans an expansionary January budget and is trying to diversify away from manufacturing into service industries such as finance and tourism.