Wage pressure to intensify over the year

[SINGAPORE] Higher wage costs will continue to crimp firms' profit margins for the rest of this year, the Monetary Authority of Singapore warned yesterday. But while some companies can pass on higher costs to customers, others - especially those in the logistics, shipping and construction industries - may not be able to sustain margins that way.

In its twice-yearly Macroeconomic Review, the central bank said that firms in these segments could see tougher days ahead. Whether because of overcapacity or keen competition, such companies may find it difficult to command higher product prices, which would otherwise help to offset rising costs.

Margins of firms in these industries have seen a steady slide in recent years - as at the end of 2013, profit margins of listed companies in these sectors were less than half the figures in early 2010.

At the same time, the impact of continued margin pressures will be uneven. Firms with a greater reliance on manpower - including those in accommodation & food services, recreational, community & personal services, and the construction sector - will feel the effects more acutely.

OCBC economist Selena Ling told The Business Times: "The writing is on the wall. The government has been trying to tell companies, especially SMEs (small and medium-sized enterprises), that you either shape up or ship out. Basically, if margins are being squeezed because costs are rising, and you have no way of passing them on and are not in a position to adopt manpower-saving technologies, it's a bit of a double whammy."

Wage pressures will only intensify over the rest of this year, as strong hiring intentions continue to butt up against a tight labour market, said the MAS.

With productivity growth likely to provide only a modest offset to this, Singapore's unit labour cost (ULC) is expected to rise by another 3 per cent in 2014. The ULC rise moderated from 5.2 per cent in 2012 to 3.1 per cent in 2013.

Coupled with the hikes in foreign worker levies, ULC - and therefore the pass-through of costs to consumers - is expected to rise further in the near term.

However, it noted that cost pass-through would be even stronger if not for government measures which have helped to offset firms' operating and development expenditures. These include the Wage Credit Scheme, the Productivity & Innovation Credit scheme and other cash grants and tax rebates offered to companies here.

Based on its simulations, the MAS estimates that these fiscal measures collectively lowered the headline inflation rate by by 0.05 per cent in 2011-2012, and 0.13 per cent in 2013. "The restraining effect in 2014-2016 is estimated to be slightly larger than that in 2013, given the enhancement to these assistance schemes in the recent Budget," it said.

With broad-based price rises on the horizon, the MAS reiterated that underlying inflation will remain firm, with sequential core price increases - which strip out accommodation and private road transport costs - staying slightly above its historical average.

On a year-ago basis, core inflation could rise to around 2.5 per cent in the second half of this year. Headline inflation is expected to be "volatile" year on year - after averaging one per cent in Q1 this year, it could surge to 2.5-3 per cent in Q2 (due to the exceptionally low base a year ago, when certificate of entitlement premiums corrected), before easing to below 2 per cent in Q4. MAS also said that employment gains will be more moderate this year, given the record-high labour force participation rate of 66.7 per cent in 2013.

"With the expected slowdown in the increase in the resident employment rate and the continued tightening of foreign worker inflows, growth of the Singapore economy will increasingly have to be met by productivity gains," it added.

Still, even as domestic restructuring efforts weigh on economic expansion, it maintained its 2014 gross domestic product growth forecast of a "modest" 2-4 per cent, citing improvements in the global economy which are expected to provide some lift here.

"Together with a mild turnaround in the global IT industry, (improving conditions in the US, Europe, and Japan) should provide some support for the domestic electronics industry as well as trade-related services."