Sept. 26 (Bloomberg) -- Singapore will probably slip into a recession this quarter for the first time since 2002 after exports and manufacturing slumped and fewer tourists visited the city state, economists said.

Growth in the $161 billion economy faltered as exports dropped for four consecutive months, and industrial output declined in July and August. Gross domestic product contracted 6 percent in the second quarter from the preceding three months. The government will announce third-quarter data in October.

Asian policy makers are warning of a deepening slowdown in their economies as demand from the U.S., Europe and Japan weakens amid turmoil in global financial markets. Goldman Sachs Group Inc. last month estimated that half of the world economy faces recession, with richer nations faring the worst.

``The Singapore economy is facing headwinds on multiple fronts,'' said Alvin Liew, an economist at Standard Chartered Plc in Singapore. ``Manufacturing is down, the government thinks tourism will fall short of targets and the unraveling of the global financial crisis will slow banking activity here.''

Economists at DBS Group Holdings Ltd. and United Overseas Bank Ltd., the nation's two largest lenders, today lowered their 2008 forecasts for growth and said Singapore will probably fall into a recession this quarter.

Currency Weakens

An economic slowdown may prompt the central bank to stop favoring currency appreciation and adopt a neutral policy, said DBS economist Irvin Seah. The currency fell 0.4 percent to S$1.4276 against the U.S. dollar at 6:13 p.m. local time.

``The underlying growth momentum of the economy is undeniably slowing down,'' Seah said. ``With growth fast heading south and inflationary risk likely to remain benign, we expect the Monetary Authority of Singapore to adopt a neutral exchange- rate policy stance in the forthcoming review in October.''

The island nation of 4.8 million people would join others in posting a technical recession, defined as two straight quarters of negative growth. New Zealand's economy contracted in the three months to June, driving the nation into its first recession in 10 years.

Japan's economy shrank 3 percent last quarter, the steepest drop since 2001, while the euro-area contracted 0.2 percent in the same period. Australia's expansion last quarter was the weakest in more than three years as consumers cut spending, and Taiwan's central bank Governor Perng Fai-nan yesterday warned of higher ``downside'' growth risks.

Estimates Cut

Singapore's government last month lowered its estimate for 2008 growth to between 4 percent and 5 percent from an earlier forecast of as much as 6 percent. The economy may grow less than 4 percent, the Straits Times reported this week, citing Trade and Industry Minister Lim Hng Kiang.

The possibility of a recession in Singapore can't be ruled out amid the worst financial turmoil in global markets since the 1930s, Finance Minister Tharman Shanmugaratnam said on Sept. 21, according to a report by the Today newspaper.

Central banks around the world have pumped over $300 billion into their financial systems to provide liquidity and revive confidence among banks after credit markets seized up. The credit crunch triggered by a housing slump in the U.S. led Lehman Brothers Holdings Inc. to file for bankruptcy and forced the sale of Merrill Lynch & Co. to Bank of America Corp.

Risks Intensify

``The financial crisis has likely intensified the downside risks to external demand and the property market,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``A likely tightening of financial conditions will impose its own drag on the domestic economy, independently of the external slowdown.''

The Singapore government last month warned that manufacturing, which makes up a quarter of the economy, will remain weak amid easing demand for pharmaceuticals, chemicals and electronics from its biggest markets. Industrial production dropped 12.2 percent last month after a 21.5 percent decline in July, the Economic Development Board said today.

The country's services industry, which accounts for about two-thirds of the economy, is also showing signs of weakening. Visitor arrivals dropped 7.7 percent in August from a year earlier, the biggest tumble since the outbreak of a respiratory virus in Asia froze travel in 2003.

Meeting a 2008 target for 10.8 million tourists will be ``more challenging,'' Senior Minister of State S. Iswaran said last week.

An inflation rate that's still near the highest in 26 years may prompt the central bank to allow slower gains in the currency rather than shift to a neutral policy, said Mark Tan, an economist at Goldman Sachs in Hong Kong. The monetary authority in April allowed a faster appreciation in the currency to damp consumer-price gains.

``There is still a need to stay vigilant on the inflation front and we think policy makers will be uneasy about easing to an outright neutral stance at their October meeting,'' he said.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

Last Updated: September 26, 2008 06:17 EDT