By Cris Prystay

A MANUFACTURING boom and spendthrift Singaporeans will help the city-state's economy to grow by about 8% this year, a sharp uptick from last year's anaemic 1.1% rise. But that's as good as it's going to get.

Private economists are unanimous that Singapore's highly trade-dependent economy will falter next year as the United States and China cool. Even the new government, headed by Lee Hsien Loong, son of founding father Lee Kuan Yew, thinks the city-state's gross domestic product will grow by about 3%-5% next year.

The whole region is bracing for a slowdown as US interest rates rise, oil prices soar and China tries to slow things down. Singapore's tiny domestic economy offers the least shelter, though. The ratio of private consumption to GDP in Singapore is just 43%, much lower than the regional average of 56%, according to Merrill Lynch. There are just too few consumers in this city-state to wield much economic clout. Electronics manufacturing still drives the economy, and when the US economy slows down, so does demand for electronics. But this slowdown won't be as sharp as the last, thanks to changes in the economy.

Singapore went into a recession in 2001 after the last global slump in demand for electronics. But since then, Singapore companies have both cut costs and expanded regionally. Singapore companies now derive 42% of their profit from outside Singapore, compared to just 20% in 1997; investment bank CLSA expects that figure to rise to 52% by 2006. A lot of this has come from Singapore's service sector--its banks, telecommunications and power companies have busily expanded across Asia in the last few years, acquiring stakes in companies from India to Australia. While all of Asia is likely to slow down next year as US demand for Asia's exports slows, the service sector will be affected the least.

Singapore, which wants to build life-sciences and education sectors, has also attracted a number of research labs and drug-manufacturing plants, and a half dozen post-secondary schools in the last couple of years. Biomedical and chemicals manufacturing accounted for about one-third of Singapore's manufacturing output in 2003, according to Morgan Stanley; electronics accounted for 39% that year, down from 49.7% in 1997.

"That's not to say the old determinants of growth are no longer important, but these things do give some resilience," says Sanjay Mathur, director of Asian economics at UBS. "Next year, when the U.S. slows, I'm sure Singapore is going to slow, but you won't see as severe a collapse as you've seen in the past."

Next year's slowdown could be pretty gradual, too. Singapore-based Brilliant Manufacturing, which makes aluminum base plates for disk drives, say first-quarter 2005 orders still look good. "We're fairly optimistic," says C.L. Chin, Brilliant's chief financial officer. The company, which scaled up capacity at its plants in Singapore and Southeast Asia to an all-time high this year, isn't planning to lay off staff, and indeed, believes it will be able to chug along at almost full steam for most of next year. "Based on what we see next year, we should be able to use about 80% of our capacity," he says. The impact of a slowdown, or pickup, in the US economy on the company's business usually lags by about six months, he says. "By the time it filters to us, we could be back into a recovery."

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