The financial and transport hub was hit hard last year by local virus-related restrictions, border closures around the world and sluggish global economy.
The bellwether economy shrank 5.8% in 2020, preliminary data showed on Monday, slightly better than the official forecast for a contraction of between 6.5% and 6%. The government has previously said it expects gross domestic product (GDP) to grow 4% to 6% this year.
The city-state has eased most of its coronavirus rules, although its borders remain largely shut. It began its COVID-19 inoculation programme last week, and the government is keen to open more of the economy with the help of the vaccine in a country dependent on travel and trade.
"Recovery going forward in 2021 will probably continue to be quite gradual," said Barclays regional economist Brian Tan. "And a lot of it will depend on the speed at which the government can distribute the COVID vaccines and whether or not this can allow us to reopen the borders more quickly."
GDP contracted 3.8% in October-December on a year-on-year basis, the ministry of trade and industry said in a statement, an improvement over the 5.6% drop in the third quarter. Economists polled by Reuters had expected a decline of 4.5%, according to the median of their forecasts.
GDP grew 2.1% on a quarter-on-quarter seasonally adjusted basis in October-December, slowing from the 9.5% expansion in the third quarter.
The Singapore dollar edged up to S$1.3203 per U.S. dollar, its highest since April 2018, after the data.
Prime Minister Lee Hsien Loong said last week that while the economy was seeing signs of stabilisation, the recovery will be uneven, and activity is likely to remain below pre-COVID-19 levels for some time.
The Singapore government has spent about S$100 billion ($75.45 billion) or 20% of its GDP, on virus-related relief to support households and businesses.
The central bank left monetary policy unchanged at its last meeting in October and said its accommodative stance would remain appropriate for some time.
"We don't expect any changes in the monetary policy for now," said Jeff Ng, senior treasury strategist at HL Bank. "The main bulk will still remain in fiscal policy in order to support the economy to recovery in 2021."
(Reporting by Chen Lin and Aradhana Aravindan; Additional reporting by Tom Westbrook; Editing by Sam Holmes)
By Chen Lin and Aradhana Aravindan