Singapore’s economy shrank for the first time in three quarters as manufacturing slumped, adding to evidence the slowdowns in Europe and the U.S. are curbing growth in Asia. The island’s currency weakened from a record.

Gross domestic product fell an annualized 7.8 percent in the second quarter from the previous three months, when it climbed a revised 27.2 percent, the trade ministry said today, citing preliminary data. The median estimate of 13 economists surveyed by Bloomberg News was for no growth.

Europe’s debt crisis and rising U.S. joblessness have threatened demand for exports from Asia and wiped more than $2 trillion off stocks worldwide since the beginning of May. China’s economic expansion eased in the second quarter and India’s industrial production unexpectedly slowed in May, reducing the scope for monetary policy tightening as regional growth cools.

“The ongoing debt crisis in Europe and the very slow recovery in the U.S. are the risk factors for the Singapore economy,” said Chow Penn Nee, an economist at United Overseas Bank Ltd. in Singapore. “With the slowing growth and easing inflation, we are not expecting the Monetary Authority of Singapore to move at the upcoming policy meeting.”

The Singapore dollar, the best performing Asian currency after the South Korean won in the past year, traded at S$1.2176 against its U.S. counterpart at 10 a.m. today, paring gains after climbing to a record S$1.2156 before the report. The currency has reached unprecedented levels since the central bank, which uses the exchange rate to manage inflation, said in April it would allow further appreciation to tame price gains.

Currency Policy

Central banks in Australia and Malaysia have kept interest rates unchanged this month to assess growth risks, even as China and Thailand boosted borrowing costs.

Singapore’s GDP increased 0.5 percent in the second quarter from a year earlier, compared with the median estimate for a 1 percent gain in the Bloomberg News survey. The government forecasts an expansion of 5 percent to 7 percent this year after a record 14.5 percent pace in 2010.

The central bank, which tightened monetary policy for the third time in a year in April, guides the local dollar against a basket of currencies within an undisclosed band. Consumer prices rose 4.5 percent in May compared with a 5.5 percent gain in January, an easing that may encourage policy makers to hold off on allowing faster currency gains in the October review.

‘Bullish’ View

“Given inflation is showing signs of peaking, there is for now less pressure on the MAS to tighten, given past hawkishness,” said Perry Kojodjojo, a currency strategist at HSBC Holdings Plc in Hong Kong. April’s policy statement “suggested a greater sense of caution over the tail risks to growth and a desire to avoid excessive strength in the Singapore dollar. This suggests the hurdle for further tightening is much higher than previously,” he said.

HSBC remains “bullish” on the Singapore dollar, Kojodjojo said.

The city state, home to the world’s second-busiest container port, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts financial services and tourism to reduce its reliance on exports. The island located at the southern end of the 600-mile (965-kilometer) Malacca Strait is among the first countries in the region to report second-quarter data.

Manufacturing Slump

China’s economy, Singapore’s biggest single export market in the five months through May, expanded 9.5 percent from a year earlier last quarter after a 9.7 percent gain the previous three months. Exports by Singapore companies such as electronics manufacturing services provider Venture Corp. are predicted by the government to grow in 2011 at less than half of last year’s pace, when overseas shipments jumped the most since 2003.

Manufacturing fell 5.5 percent from a year earlier in the three months ended June 30, after gaining 16.4 percent in previous period.

Singapore’s services industry grew 3.3 percent last quarter from a year earlier, after climbing a revised 7.6 percent in the previous three months. The construction industry grew 1.6 percent, compared with a 2.4 percent increase in the first quarter.

Companies from Singapore Airlines Ltd. (SIA) to hotel operator Shangri-La Asia Ltd. are benefitting from gains in tourism as visitors arrive in record numbers, lured by the city’s two casinos run by Genting Singapore Plc (GENS) and Las Vegas Sands Corp.

Singapore expects as many as 13 million tourists to visit this year compared with 11.6 million in 2010, S. Iswaran, second minister for trade and industry, said this week. Tourism receipts are forecast to rise to S$22 billion ($18 billion) to S$23 billion this year from about S$18.9 billion in 2010, he said.

Bloomberg