THE high price Singapore is paying for restructuring is coming to the fore, with the latest official data making stark the cost in terms of inflation and growth.
For one thing, the widening gap between headline and core inflation is highlighting mounting cost pressures; from the growth perspective, labour-reliant sectors are being hemmed in by manpower restrictions (view infographic).
On Tuesday, the Ministry of Trade and Industry (MTI) said that third-quarter GDP (gross domestic product) growth came in flat at 2.4 per cent year on year - disappointing private-sector economists who had hoped for a 2.7 per cent expansion.
The Monetary Authority of Singapore (MAS) also kept its monetary policy unchanged, just as the market had expected - keeping the Singapore dollar on an appreciating path to guard against inflation.
In response, some private-sector economists - including those from Citi, JPMorgan Chase, Mizuho, OCBC and UOB - downgraded their full-year GDP growth projections to around the 3 per cent mark, although their revised figures remain within the government's unchanged forecast range of 2.5-3.5 per cent.
While MAS said that a "broadly similar pace of expansion" is to be expected in 2015, it warned that growth performance will vary across industries, in part due to restructuring pains.
"Some manufacturing firms are facing supply-side constraints and falling product prices. As they reconfigure their operations in Singapore, output could be negatively impacted in the short term. The domestic-oriented healthcare and education sectors will stay resilient on the back of strong underlying demand, though other services industries that are reliant on labour and face greater competition could experience profit margin pressures," said the central bank.
Commenting on the MAS statement, HSBC economist Joseph Incalcaterra flagged how the government "clearly (stated) the prospect that certain industries will continue to see headwinds due to a mix of domestic restructuring and uneven external recovery", while OCBC economist Selena Ling believes the divergent sectoral growth trajectory is likely to remain, and that domestic restructuring "remains the main bugbear".
Added Bank of America Merrill Lynch's Chua Hak Bin: "Restructuring continues to weigh primarily on manufacturing. Weaker manufacturing is in turn hurting exports and trade-related services. Labour-intensive services segments are also feeling the pinch from stricter foreign labour policies."
In its twice-yearly monetary policy statement also released on Tuesday, MAS said it will keep the Singapore dollar appreciating along the same "modest and gradual" path that it has stuck to since April 2012. For the fifth review in a row, no change has been made to the policy band's midpoint, slope or width.
Economists told The Business Times that the prolonged period of "no change" makes sense, since core inflation is projected to "remain firm" amid economic restructuring.
Indeed, while MAS said headline inflation should stay "subdued", core inflation - which strips out private road transport and accommodation costs - is forecast to remain stubbornly above its historical average of 2 per cent. With the economy at full employment, higher wages are expected to continue filtering through to prices. Coupled with the possibility of higher regional food prices, the gap between headline and core inflation is projected to widen further.
Narrowing its core inflation forecast for 2014, MAS said: "On a year-ago basis, core inflation is projected to pick up gradually into early next year, before easing in the second half of 2015. Core inflation is forecast to average 2-2.5 per cent in 2014 (compared to 2-3 per cent previously) and 2-3 per cent in 2015."
Overall inflation, on the other hand, is expected to come in far below that. Given the recent weakness in car prices, the central bank lowered its headline inflation forecast to 1-1.5 per cent in 2014, from 1.5-2 per cent earlier. As for next year, MAS expects headline inflation to be at 0.5-1.5 per cent.
Explaining why headline inflation should stay subdued for the rest of this year and throughout 2015, MAS said: "Car prices and imputed rentals on owner-occupied accommodation will continue to dampen inflationary pressures, amid the expected increase in the supply of COEs and newly-completed housing units."