Singapore: Singapore's economy shrank for the first time in three quarters as weaker manufacturing output interrupted the island's recovery from its deepest recession since independence in 1965.

Gross domestic product (GDP) contracted an annualised 6.8 per cent from the previous three months last quarter after climbing a revised 14.9 per cent from July to September, the trade ministry said in a statement on Monday.

That was worse than the median estimate for a 2.1 per cent decline in a Bloomberg News survey of eight economists. The economy shrank 2.1 per cent in 2009.

The economy is improving after a "volatile" year that saw it contract for the first time since 2001, Prime Minister Lee Hsien Loong said on December 31.

There's an increasing likelihood the central bank may allow the Singapore dollar to strengthen at its next monetary policy review in April, according to economists at HSBC Holdings and Barclays.

"The weakness of the fourth quarter was almost entirely attributable to a reversal" in pharmaceutical output from the previous six months, said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings in Singapore. "Activity and inflation will surprise on the upside, making a move back to modest and gradual appreciation of the Singapore dollar slightly more likely than not at the next meeting."

Singapore's economy grew 3.5 per cent in the fourth quarter from a year earlier, compared with the median estimate for a 3.8 per cent gain in a Bloomberg News survey of nine economists.

The benchmark stock index fell 0.3 per cent to 2,889.14 yesterday. The Singapore dollar was little changed at S$1.4024 versus the US currency.

The opening of two casino-resorts in the coming months will help support the economy this year, according to Nomura Holdings Inc.

Genting Singapore unit Resorts World Sentosa plans to open its $4.5 billion (Dh16.5 billion) project in early 2010, and Las Vegas Sands Corp says it may open the Marina Bay Sands in April.

"We see the GDP decline as temporary and the economy will pick up this year as the services industry gets a boost from the opening of the casinos and tourism-related sectors," said Tetsuji Sano, a Singapore-based economist at Nomura.