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Room to grow Singapore's output per worker by exporting more services: MAS
SINGAPORE could raise some industries’ sluggish productivity by exporting more services, the central bank has suggested, in a half-yearly economic review issued on Friday.
The call for more businesses to venture abroad came as the Monetary Authority of Singapore (MAS) flagged a productivity gap between its domestic-serving or “non-tradable” industries, and other industries - like manufacturing - that are geared towards external demand.
In a tale of two sectors, the MAS has estimated that productivity in the tradable sector grew by an average of 3.3 per cent a year between 2011 and 2018 - far outpacing the non-tradable sector’s 0.3 per cent increase in the same period.
While there are structural reasons for the difference, the gap between these two sectors is about twice the size of what other advanced economies have charted, the MAS said.
“There is thus opportunity for the productivity of the non-tradable sector to catch up,” it added.
As direct external demand made up 16 per cent of the non-tradable sector’s economic value added in 2014 - the most recent year for which the MAS had data - the report said “expanding the market base beyond Singapore could potentially provide a boost to non-tradable productivity”.
Value added refers to the value of goods and services produced in Singapore.
The central bank also suggested boosting links between Singapore’s domestic-facing business services industries, and trade-oriented ones such as transport and storage.
“Singapore could further develop a strong ecosystem of local firms with deep expertise in the professional, scientific and technical services to better leverage upon the existing synergies between these industries,” the MAS said.
The latest call to action came against the backdrop of a 2.5 per cent overall rise in productivity in 2018, compared with the previous year’s 4.1 per cent improvement.
Labour market conditions are still firm, the MAS said in its report, while noting that the resident unemployment rate fell from 3.1 per cent in 2017 to 2.9 per cent in 2018.
The resident unemployment rate was steady at 3 per cent as at end-March 2019, according to a separate report from the Manpower Ministry on Friday morning.
But wage growth, coupled with slacker productivity, pushed up the unit cost of labour in the services industries from 2013 to 2018 even as the unit labour cost slid in goods-producing industries - as the Ministry of Trade and Industry had earlier observed, in a quarterly economic survey in February.
The unit cost of labour is the average cost of labour - such as workers’ income - needed for each unit of economic output produced.
The MAS has now said that “the stronger rise in unit labour cost in the domestic-facing services industries, such as retail trade in particular, could see cost pressures filter through to consumer prices eventually”.
The price of services increased by 1.5 per cent in 2018, and services inflation is now expected to “come in higher” in 2019, according to the central bank’s review.
Growth in business costs is expected to be driven by the key labour component in 2019, with unit labour cost expected to rise by 2 per cent for the overall economy - much faster than the 0.5 per cent increase clocked in 2018.
The MAS attributed the year-on-year productivity slowdown to both a global slump in electronics manufacturing, as well as “cyclical moderation across the services sector in general”.
With the economy expected to cool further this year, “productivity growth is likely to come in lower” in 2019, the central bank added - especially as output suffers.
Meanwhile, resident workers’ wage growth “is likely to taper slightly in 2019” from the 3.5 per cent increase clocked in 2018, on the back of slower economic growth, said the MAS - although the capital-intensive manufacturing sector will be hit the hardest, which gives some uplift.
Singapore’s tradable sectors contributed to about 65 per cent of economic growth in the past decade while employing just 40 per cent of workers, MAS estimates have shown.
The official forecast is for economic growth in 2019 to be “slightly below the mid-point” of a range between 1.5 per cent and 3.5 per cent, while core inflation - which excludes the costs of housing and private road transport - has been tipped to fall between 1 per cent and 2 per cent, after a half-point downward revision by the MAS in April.