Singapore's trade-dependent economy last year shrank slightly less than initially forecast but the Government says tough challenges remain even as growth returns. In its annual review of the economy, the Ministry of Trade and Industry (MTI) said gross domestic product contracted 2 per cent last year. Despite the upwards revision, last year still ranks as the worst performance since 1964. Officials said last year's recession was driven by the unprecedented high-technology slump and the slowdown in the United States. Deputy secretary at the MTI, Ho Meng Kit, said the Government was sticking with its GDP forecast for this year - estimating growth between 1 per cent and 3 per cent. However, there were 'quite choppy waters ahead' even as most domestic leading indicators pointed to a gradual recovery, Mr Ho said. The composite leading index, which leads economic activity by between six and nine months, rose 4.5 per cent in the fourth quarter last year. It was the first rise in six quarters and followed a 3.6 per cent contraction in the preceding quarter. Singapore's business expectations surveys 'show that while sentiment remains cautious, more businesses in the manufacturing as well as the services sector expect an improvement in the economy' a ministry statement said. Yesterday's assessment came just two days after the Government said manufacturing output rose a year-on-year 4.7 per cent last month, the first gain since early last year. The statement said: 'After a dismal performance . . . in 2001, the global economy is expected to pick up this year . . . the global electronics industry, which saw a record decline of 32 per cent last year, is also expected to turn around.' The ministry restated long-standing concerns that Singapore must adapt quickly to react to the rapid expansion of the mainland economy, which is drawing investment and jobs away from Southeast Asia. It also highlighted Singapore's considerable exposure to electronics, which account for more than 60 per cent of non-oil domestic exports. A ministry study said: 'In order to achieve sustainable economic growth, there is a need for new industries to compensate for the relocation of end-products and low-end parts production. 'As China rapidly gains stature as a major electronics producer, the outflow of manufacturing activities would likely gather momentum, and this could result in a further easing of Singapore's global electronics shares.' Official estimates suggested Singapore could expect average long-term growth of between 4 per cent and 5.9 per cent a year in the coming decade. That compares with 8.9 per cent a year between 1991 and 1996, and 3.4 per cent a year between 1998 and last year. The study said domestic growth was driven by the US economy, world chip sales, local construction, and activity in neighbouring Malaysia and Indonesia. 'Singapore's long-term growth rate might well be a low 4 per cent on the less optimistic side, especially when the recovery of [Indonesia and Malaysia] could be very much hampered by volatile political developments from time to time,' it said. 'Singapore will have to search for other sources of demand.' Last year, the Government convened an Economic Review Committee headed by Deputy Prime Minister Lee Hsien Loong to draw up a fresh strategic vision for the economy. Initial conclusions and policy recommendations will be released with the Budget in May, followed by a full report in August or September.