MAS Macroeconomic Review

MAS's sobering take on S'pore economy

GDP and productivity growth to remain constrained; core inflation to stay above historical average


THE Monetary Authority of Singapore (MAS) has presented a sobering prognosis of the Singapore economy - GDP expansion will continue to be muted, productivity growth will remain constrained, and core inflation will stay above its historical average on the back of labour cost pressures. The manufacturing sector, too, continues to face difficulties from land and labour constraints, although one positive is that companies have been moving up the value creation chain successfully.

In reiterating its 2014 GDP growth forecast of 2.5-3.5 per cent in its twice-yearly Macroeconomic Review on Tuesday, the central bank also sought to put it in perspective: "This should be seen in the context of the domestic economy settling down to a slower, but more sustainable growth path. With Singapore's relatively high real GDP per capita of US$61,000 (S$77,723) and labour productivity of US$99,700 on a purchasing power parity-adjusted basis (as at 2013), the moderation in the medium-term growth rate is in line with global experience."

In response, UOB economist Francis Tan said: "I see this as the MAS trying to temper growth expectations, to remind people to be more realistic. An abundance of labour is no longer part of the equation, so we won't be seeing growth of 6 or 7 per cent any longer."

Looking ahead, the MAS said that a "broadly similar" pace of growth is expected in 2015, and that the Singapore economy is "on track for moderate growth" despite some external and domestic headwinds. It qualified, however, that the performance across sectors will be uneven. "Sectors that cater to final demand in the US will fare relatively favourably, while those that are tied to the eurozone and China could be weighed down by the sluggish performance in these economies. Concomitantly, some of these external-facing industries will continue to grapple with resource constraints and falling product prices.

"Meanwhile, domestic-oriented sectors will remain resilient on the back of firm underlying demand, although those segments that are more reliant on labour input, or face greater competition, could experience profit margin pressure," said the central bank.

Still, beyond 2015, Mizuho economist Vishnu Varathan isn't ruling out a growth performance better than 2.5-3.5 per cent: "Apart from the external crosswinds highlighted by the MAS, we also have a domestic economy still undergoing restructuring, which is a major change. So you can't really decide how you're going to look when you're still in the changing room ... As we innovate with our regional services, we could very well see a significantly higher pace of growth in the next few years."

As for the manufacturing sector, the MAS noted the industry's "continuous evolution", with the most recent phase of change marking a shift from mass production, to higher-margin niche production and services. It is particularly optimistic about the prospects of the electronics and information & communication sectors, expecting "a healthy pipeline of investments" to boost output in the near to medium term.

On the productivity front, overall labour productivity fell by 0.3 per cent year-on-year in the first half of 2014, after rising by 0.8 per cent in the second half of 2013, due to the weak performances of the services and construction sectors.

As such, Singapore's unit labour cost (ULC) rose more significantly by 3.1 per cent in H12014, compared to 1.2 per cent in H22013.

Said the MAS: "Productivity growth will be constrained in the short term, given the lack of a strong cyclical rebound. It will also take time for firms to reduce their reliance on workers, especially in construction and services. Accordingly, ULC is expected to rise moderately in the near term, even with government subsidies, such as the Wage Credit Scheme."

The MAS added that strong labour demand will continue to butt up against labour supply constraints, keeping wage growth firm; the economy-wide resident wage growth is expected to be around its 10-year historical average of 3.7 per cent in 2014 and 2015. Therefore, domestic cost pressures - mainly stemming from the tight labour market - will remain the "primary source" of inflation.

Summing up its outlook on the Singapore economy, the central bank said: "Resource constraints amid intermittent external headwinds will temper growth, but as firms leverage more intensively on capital and skills, the transitional costs during the adjustment phase will ebb. Higher productivity and more capital-intensive modes of production will provide a firmer basis for Singapore's future growth prospects."

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