This was caused almost single-handedly by the notoriously volatile pharmaceutical industry, which suffered a massive decline.

The poor results add to the gloomy outlook for local manufacturers, whose products are selling much more slowly overseas, as seen in last week's export data.

Economists, who were expecting an improvement from April's 4.9 per cent contraction, still took heart that last month's fall was highly skewed by one sector.

But they said the two big consecutive declines by the industrial sector so far will likely drag down this quarter's overall economic growth, with one analyst even downgrading his forecast for the full year.

'With first-half manufacturing growth likely to come in below 5 per cent, we are lowering our second-quarter gross domestic product (GDP) growth estimate from 5 per cent to 2.5 per cent, and our full-year GDP forecast from 5.8 per cent to 4.6 per cent,' said CIMB-GK economist Song Seng Wun. GDP is a measure of economic output.

Last month's industrial output performance fell far short of expectations of a 2.3 per cent decline, according to the median forecast from a Bloomberg News poll of 16 economists. It was even far worse than the lowest prediction of a 6.5 per cent contraction.

A 58.2 per cent slump in drug output was the main culprit. Economists had expected a rebound after April's 26.2 per cent decline. Instead, output fell to its lowest level in more than three years, raising fears that the dire numbers may point to more fundamental problems.

But Barclays Capital economist Leong Wai Ho said the local industry is still fairly young, so if production lines at the largest plant were to shut down consecutively for cleaning, overall output would suffer the protracted falls that are being recorded.

'If you read between the lines, you'll see that the weakness in industrial output is narrowly centred on drugs,' he said, adding that other sectors showed signs of resilience, such as transport engineering's robust 13 per cent surge.

Electronics posted a surprise 3.8 per cent rebound, though United Overseas Bank economist Ng Shing Yi warned that weak demand from United States consumers would likely send the key sector back in the red this month.

Mr Leong said the drug slump of the past two months may hurt this quarter's economic growth. But the industry should bounce back eventually, so overall impact on the full year is minimal.

Sharing this hope is HSBC's Mr Robert Prior-Wandesforde, who is looking for a strong rebound in GDP growth in the next quarter, mirroring the first quarter of this year. 'The fundamentals are generally still positive for the Singapore economy,' he said.

'Employment and wage growth are both running in double-digit territory, boosting personal incomes. Also, fiscal policy is supportive, short-term interest rates are incredibly low and real interest rates across the spectrum are negative. Lending growth is running at 20 per cent as well.'

bryanlee@sph.com.sg