SINGAPORE - Singapore's economy shrank 6.8% in the fourth quarter to December from the previous three months, but the slowdown was less than expected for the whole year, the trade ministry said Monday.

The decline in gross domestic product (GDP) was attributed to weakness in the key manufacturing sector, which shrank 38.4% on a seasonally adjusted quarter-on-quarter annualised basis, it said.

The slide in manufacturing, a dramatic reverse from the 29.6% growth of the third quarter, was mainly due to a fall in output from pharmaceuticals and transport engineering, the ministry said, releasing preliminary estimates.

Singapore banking giant DBS said in a research note that the global demand for pharmaceuticals "is dissipating as the effects arising from the H1N1 flu outbreak wears off."

The trade ministry said that other manufacturing segments such as electronics, chemicals and precision engineering posted positive growth.

Outside manufacturing, the services sector, which covers tourism and financial services, was up 7.2% quarter-on-quarter, while construction climbed 4.3%.

Compared with the previous year, however, overall GDP rose 3.5% in the fourth quarter.

The ministry confirmed Prime Minister Lee Hsien Loong's New Year's eve announcement that the economy contracted 2.1% in 2009 after being hammered by the global economic crisis, but less than originally feared.

Lee said the economy was expected to grow between 3% and 5% this year.

DBS said it was unlikely that weakness in the manufacturing sector, a pillar of the trade-reliant economy, would derail the economic rebound.

The growth in services "has provided an encouraging evidence to support our prediction that the services sector will pick up the slack from manufacturing to become the key driver of growth in 2010," DBS said.

"Overall, the economy remains on track to achieve our growth forecast of 6% for 2010," it added.

Singapore's economy became the first in Asia to slip into recession in the third quarter of 2008 after the fall of US investment bank Lehman Brothers sparked a crisis that led to a collapse in global consumption.

The government declared the recession over in November, but cautioned that the strength of its recovery would depend on the pace of rebound in Singapore's major trading partners such as the United States, the European Union and Japan.

With the economy contracting less than feared, Singapore escaped what could have been its worst recession since independence in 1965, thanks in part to a 20.5 billion Singapore-dollar ($14.5 billion) government stimulus package.

Singapore's worst recession on record is the 2.4% contraction in its GDP following the collapse of the technology bubble in 2001.