Singapore’s economy expanded last quarter after a pick-up in manufacturing at the year end, with the government predicting an improvement in overseas demand in 2014 amid a global recovery.

Gross domestic product rose an annualized 6.1 percent in the three months through December from the previous quarter, when it climbed a revised 0.3 percent, the trade ministry said in a statement today. That compares with a January estimate of a 2.7 percent contraction and the median in a Bloomberg News survey of 12 analysts for a 0.8 percent gain.

The expansion is good news for the city-state’s companies that have struggled with tepid demand and rising costs, and the government may announce in its annual budget tomorrow measures to help businesses cope better. At the same time, as one of the most open economies, Singapore is vulnerable to fluctuations in world growth and the International Monetary Fund said this year’s improved global outlook hinges on recent market volatility from Turkey to Brazil being short-lived.

“The underlying growth trend is underpinned by improving global conditions, but the recovery will also be bumpy,” said Vishnu Varathan, an economist at Mizuho Bank Ltd. in Singapore.

The Singapore dollar was little changed at S$1.2635 against its U.S. counterpart as of 9:44 a.m. local time.

Global Growth

GDP (SGDPYOY) increased 5.5 percent last quarter from a year earlier, today’s report showed. The economy grew a revised 4.1 percent in 2013, and the government reiterated its forecast for a 2 percent to 4 percent expansion this year. The trade promotion agency today maintained its forecast for exports to rise 1 percent to 3 percent in 2014.

Initial estimates released in January were computed largely from data for October and November. Singapore’s industrial production and non-oil domestic exports rose more than economists estimated in December.

The island’s output can be affected by swings in pharmaceuticals production by companies such as Sanofi-Aventis SA as drug makers sometimes shut plants for cleaning before making different products. The government said today it also revised estimates for 2012 after it received more data from some services industries.

While the IMF last month raised its projection for global growth this year as expansions in the U.S. and U.K. quicken, it said yesterday that risks of prolonged market turmoil in emerging markets and of deflation in the euro area are threatening improved economic prospects.

Weak Recovery

The IMF, in a staff report prepared for central bankers and finance ministers from the Group of 20, said the recovery is still weak and “significant downside risks remain.” A January global growth forecast of 3.7 percent for this year, from 3 percent in 2013, depends on market volatility being short-lived, it said.

Singapore’s manufacturing grew 10.4 percent in the fourth quarter from the previous three months, compared with a January estimate of a 4 percent contraction. Services rose 6.1 percent in the same period, while construction expanded 1.4 percent.

Home prices slid for the first time in almost two years last quarter as the government introduced more taxes and restrictions to widen a campaign begun in 2009 to curb speculation in Asia’s second-most expensive luxury housing market. The measures came as housing values rose in the past five years to a record amid low interest rates, raising concerns of a property bubble.

Gradual Appreciation

The Monetary Authority of Singapore maintained its commitment to a modest and gradual appreciation of the currency in October, forgoing stimulus to manage price gains. While companies face domestic cost pressures from higher rentals and wages, imported inflation is expected to remain subdued, the trade ministry and central bank said last month.

The policy stance remains “unchanged and appropriate,” central bank Deputy Managing Director Jacqueline Loh told reporters today.

“They are in a very nice, comfortable position currently,” said Edward Lee, regional head of research at Standard Chartered Plc in Singapore, referring to the central bank. “Inflation is slowing. Growth is also improving slightly.”

Singapore is nearing the midpoint of a 10-year economic transition strategy to move away from dependence on cheap overseas workers while attracting new industries such as research and development. Prime Minister Lee Hsien Loong has in recent years tightened the hiring of foreigners, after an influx led to voter discontent over infrastructure strains and increased competition for jobs, property and education.

Small Companies

The government in its budget tomorrow may enhance measures to help small companies produce more with fewer workers to cope with the city’s labor shortage, economists at Bank of America Corp. and Citigroup Inc. said. Labor productivity climbed in the second and third quarters of 2013, after consecutive declines in the six previous ones. The government said in 2010 it wants to achieve annual productivity growth of 2 percent to 3 percent.

The island’s unemployment rate held at 1.8 percent in the three months through December, matching a five-year low reached in the last quarter of 2012. To bolster the workforce, Lee has encouraged young couples to have more babies while encouraging older Singaporeans to return to work.

“Tightness in labor conditions could weigh on growth in some labor-intensive domestically-oriented sectors,” the trade ministry said today.

Medical Expenses

Lee said in a New Year message that the government is “working steadily” toward new directions for the country, including strengthening social safety nets and sharing “fruits of progress more widely” through support for low-wage earners and homeownership programs. The government will set out its agenda for the rest of its term later this year, he said.

Finance Minister Tharman Shanmugaratnam will unveil details of a so-called Pioneer Generation Package designed to reduce medical expenses for elderly Singaporeans in the budget tomorrow, Lee said Feb. 9. The package will probably build on existing social safety nets, according to Wai Ho Leong, an economist at Barclays Plc in Singapore.

Bloomberg