SINGAPORE'S drive in restructuring its economy to lift productivity has failed thus far, and its drag on economic growth is expected to last until the end of this decade, said Nomura's Global Markets Research team in a report published on Friday.
It predicted that, with an aging population thrown into the mix, the potential growth rate for Singapore will fall from the current 3.8 per cent to 2.1 per cent in the next five years.
"It seems to us that the failure of the restructuring drive to lift productivity growth has to do with implementation," wrote the authors of the report, titled "Singapore's productivity conundrum".
"If productivity growth remains sluggish in 2015 to 2020, as we expect, the economic restructuring is unlikely to be completed by the end of the decade."
Singapore's Economic Strategies Committee, in a report launched in February 2010, had set a productivity growth target for the economy of 2 to 3 per cent a year.
Singapore then went about restructuring its economy that year, with the government encouraging companies to rely less on labour and to use technology to raise productivity.
But figures obtained from the Department of Statistics' website indicate that labour productivity growth has been dismal in recent years: Though it grew 2.3 per cent in 2011 from the previous year, it dipped 0.5 per cent in 2012.
It then went up slightly by 0.3 per cent in 2013, only to shrink again by 0.8 per cent last year.
In the first quarter of 2015, it fell 0.3 per cent from the first quarter of 2014, and a farther 0.6 per cent for the second quarter.
"Labour productivity growth, measured as output per worker, has still not picked up, nearly five years into the restructuring drive," Nomura noted.
One of the reasons cited for the dip in productivity was that the policies to restrict the inflow of foreign labour had had varied impact across different sectors.
The reliance on foreign labour by the construction sector, for example, actually raised its employment share between 2009 and 2014. Yet, it remains one of the least productive sectors.
Another reason cited was that the the part-time workers who are filling job vacancies often tend to be lower-skilled and less productive.
High rental and labour costs were also turning firms' attention away from improving productivity.
The report noted that in a poll conducted by KMPG late last year, only 9.8 per cent of the firms polled cited productivity improvement as their greatest concern; 40.9 per cent worried about rental and labour costs.
Then there are the external challenges that Singapore faces in order to increase productivity - chief of all, the tepid global demand.
With net exports accounting for at least a fifth of real gross domestic product (GDP), sluggish global demand will complicate Singapore's restructuring efforts.
Stressing that the income elasticity of global trade - the quantum of increase in exports and imports generated by each unit of global income - has a significant impact on Singapore's economy, the report noted that the International Monetary Fund has projected a 1.6 per cent potential growth for the global economy in 2015 to 2020.
However, given that exports of goods are about three times larger than those of services in Singapore, it is unlikely that the exports of services can lift the overall export growth figure.
Nomura estimated that Singapore's fiscal costs of restructuring has reached 5.6 per cent of GDP amid demographic challenges brought on by a greying population, which shrinks the labour force and increases social spending.
This will strain government finances, with Nomura predicting that income taxes will be raised beyond 2020 as the government avoids the politically-sensitive move of raising the Goods and Services Tax (GST).
"As a result, we expect the tight labour market and the emphasis on productivity growth to become permanent features of the Singapore economy and the policy agenda," said the report.