Yesterday's (Oct 10) figures on the parlous state of the economy from the Ministry of Trade and Industry (MTI) shocked even the most pessimistic of observers. They showed that Singapore is facing the most severe economic crisis in its 36-year history as an independent state.

Gross domestic product is set to contract by an estimated 3 per cent this year, an unprecedented decline in the country's economic fortunes. The best estimate that the MTI's number crunchers could provide for next year was a spread of minus 2 per cent to plus 2 per cent, centred on zero growth. The figures underline the fact that Singapore's leaders are grappling with a gruelling recession and their toughest political challenge in decades.

The task at the dispatch box for Mr Lee is to outline a package of off-Budget measures to blunt the impact of what Cabinet colleague George Yeo Yong Boon yesterday dubbed the "perfect storm" - or an unforeseeable concatenation of untoward events. The long-scheduled response will be the second such intervention this year after Mr Yeo, the minister for trade and industry, unveiled extra spending and tax cuts worth S$2.2 billion in July.

Manu Bhaskaran, group head of research at SG Securities, said: "The GDP numbers are much worse than everyone expected. The off-Budget measures will need to be very aggressive; they would need to be in the circumstances." As citizens digested yesterday's data and projections, many were asking how Singapore's economy had gone off the rails so spectacularly and how much room for manoeuvre officials had in framing their short and long-term responses. They did so aware that the government must call a general election by next August, with most expecting a poll before the year is out.

Politicians and economists say Singapore has found itself subjected to an especially unfortunate confluence of negative factors, which have combined to undermine all of its usual sources of growth at the same time.

First and crucially for a small, relatively open nation that lives by trade, all of Singapore's big export markets - the United States, Europe and Japan - have cooled rapidly this year, raising the spectre of a global recession. Second, the widespread economic slowdown has been accentuated by a vicious downturn in the hi-tech sector, a key pillar of Singapore's economy, accounting for about two-thirds of non-oil exports.

"The global economy is experiencing its most severe synchronised deceleration since the 1974 oil shock," Mr Yeo said at yesterday's ministerial briefing. "Prior to September 11, the International Monetary Fund was already estimating global economic growth in 2001 to slow to only 2.6 per cent - versus 4.7 per cent in 2000 - the fastest deceleration in about 30 years."

Mr Yeo also noted that the hi-tech slump under way since late last year had yet to bottom out. Worldwide semiconductor sales dropped 42 per cent in August after a 37 per cent fall the month before. The global DRam industry is seen contracting by 55 per cent this year and no recovery is forecast until well into next year. For Singapore - which has more than a dozen wafer fabrication plants either in operation or under construction, some backed in part by state funds - this is bad news indeed.

These trends have been made far worse by the dramatic impact of the suicide attacks in the US and Washington's military response in Central Asia. The burgeoning conflict is undermining Singapore's already weakened economy, which is home to many thousands of multinational companies, many of them American. It is worth noting that yesterday's initial assessment of third-quarter performance did not take full account of events last month, the most crucial period.

"Financial markets have become more risk-averse [since the attacks] and consumers are more reluctant to spend," Mr Yeo said. "Air travel has [been] reduced significantly as business executives travel less and fewer business deals are made. As a result, many airlines and many other companies have started retrenching staff."

There is also concern among Singaporean policymakers about the potential for disruption in neighbouring, majority-Muslim states, which may affect business sentiment at home. Indonesia - the world's largest Muslim country - has witnessed growing social unrest this week as US and allied forces bombarded Afghanistan.

On top of these harsh factors, the Lion City is confronting longer-term structural challenges. Foremost among these is the growing impact of China's economic clout, which has been drawing international investment away from Southeast Asia, the extended hinterland that Singapore serves. Although few low-end jobs are likely to be transferred directly from the city-state to the mainland, the process has been affecting many of Singapore's neighbours, casting a pall over its own prospects.

In light of the deterioration, the Monetary Authority of Singapore (MAS), the country's de facto central bank, yesterday widened the band in which it allows the Singapore dollar to trade, but said it was maintaining its neutral stance.

Analysts said that the move, in effect, paved the way for an easing of the currency against those of its major trading partners. After the MAS made its announcement, the Singapore dollar slipped half a cent against its US counterpart to S$1.8080, a 10-week low.

Summing up the sombre mood, the MAS said: "The near-term prospects for the economy are clouded and uncertain, but it is obvious that the downturn will be more protracted than earlier anticipated. The outlook for the external economic environment has weakened significantly, especially after September 11, 2001."

As Deputy Prime Minister Lee and Mr Yeo know - and as many in the city-state have already pointed out - the main drivers of the present crisis are external, striking at the ability of companies to maintain profitability and payrolls. The focus of tomorrow's aid is therefore likely to be skewed towards lowering costs, enabling companies to preserve as many jobs as possible. Although this will not prevent the number of jobless from rising, it could help put a cap on the unemployment level. There is also likely to be a limited amount of pump-priming in the package, although the effectiveness of such moves in such a small economy is severely limited.

"The government will help businesses and workers affected by the downturn, especially those who are retrenched," Mr Yeo said. "Because of prudent budgeting, we have the resources to do so." Singapore's foreign exchange reserves, which are handled by the MAS, amount to a little over US$75 billion. These funds are, however, regarded as a crucial national asset and are unlikely to be touched.

Separately, the government has accumulated about S$10 billion in budget surpluses between 1998 and last year. This year, the projected surplus, which is held by the ministry of finance, was put at S$4.36 billion, although that estimate was released before the first batch of aid was announced in July. At least part of these funds is likely to be deployed tomorrow by Mr Lee.

In August, Mr Goh announced that he intended to hand over a sizeable chunk of these surpluses to all adult Singaporeans in a so-called New Singapore Shares scheme. Few details of the proposal have been announced other than a pledge to give extra shares to the least well-off.

In the longer term, Singapore is likely to press on with a range of longstanding policies to try to bolster the economy's competitiveness and resilience. Mr Yeo said yesterday that these moves included efforts to develop biochemical industries, including the life sciences; a further liberalisation of the services sector; and a continued emphasis on worker retraining and education.

At the end of his remarks yesterday, Mr Yeo said Singapore was well prepared to face the recession, despite its severity. Reserves were stronger, infrastructure more sophisticated and people were more skilled, he said, adding that Singapore had in the past "emerged stronger after each crisis". As Mr Lee stands to deliver his address he will surely be hoping that the government salvo will help to ensure that is the case once again.