Prime Minister Goh Chok Tong said that output had shrunk 1.5% in the third quarter of 1998, compared to the same period a year ago.

At the same time, the government said early figures had showed the jobless rate had shot up in September to 4.5% from just 2.3% in June.

Prime Minister Goh Chok Tong said that with Asia's "crisis now spreading to other parts of the world, we can expect Singapore economic growth to remain weak for a couple of years."

Asian contagion spreading

Singaporeans monitor their investments on a stock board

Singapore's financial markets have been feeling the effects of the East Asian economic crisis for many months.

This is the clearest evidence that the real economy is suffering too.

After climbing nearly 8% last year, output is now falling.

Singapore does not suffer from the serious weaknesses - especially in banking regulation - that left countries such as Thailand and South Korea so exposed when there was a loss of confidence in the financial markets.

But the massive declines in the currencies of Singapore's neighbours have undermined its competitiveness in international markets.

That is a critical problem; Singapore is one of the most export dependent economies in the world.

Electronics exports hit

In addition, global demand for electronic goods is very weak and that sector accounts for 77% of Singapore's manufactured goods exports.

Business profits have fallen sharply as a result.

"Before the regional crisis broke out, our share of the total US electronics import market was 9.3% in the second quarter of 1997. It has dropped to 7.4% in August 1998," Goh said.

Call for tax cuts

The prime minister says that the cost of doing business in Singapore must be reduced to help companies compete and attract more investment and called for government tax cuts and for workers to forego wage rises:

Singapore's economy has been hit by a decline in demand for electonic goods

"We have to reduce sharply the costs of doing business in Singapore. Petrol duties, fees, taxes have all to be cut." he said.

Gho says there is a one in five chance of what he calls another financial typhoon in the region.

Singapore, he said must be ready for that eventuality.

But some economists said that the gloomy output figures were actually an indication of how resilient Singapore's economy was proving in the midst of the Asian meltdown.

"The only surprise is the GDP figure was stronger than what we had expected. We were projecting a contraction of 2.9%," said one economist with a European research house.