SINGAPORE - Singapore's medium-term trend GDP growth has been estimated at around 2.5 per cent - nearly half that of the previous decade - as the nation grapples with labour constraints and tepid productivity growth, a report said.
The government's efforts to restructure the economy and scale back dependence on foreign labour is taking 0.9 percentage point off growth in terms of Singapore's productive potential, according to a Credit Suisse research report released on Thursday.
The consequences of lower GDP growth vis-a-vis recent years could include weaker foreign direct investment (FDI) inflows on the back of land and labour constraints, more conservative government spending owing to lower fiscal revenue and potentially more moderate growth in property prices.
The 2.5 per cent trend GDP growth is based on assumptions of 1.5 per cent labour force growth in the medium term and labour productivity growth of one per cent.
Credit Suisse economist Michael Wan noted that productivity growth is likely to remain lacklustre in the medium term, forecasting one per cent trend productivity growth, lower than the government's 2-3 per cent annual target for this decade as per its much-discussed Population White Paper released earlier this year.
While a revival of the global economy could enhance productivity growth, Singapore has shown a shift towards more domestically oriented services - such as hospitality, food & beverage and business services - which display lower levels of labour productivity in comparison to externally oriented services sectors such as wholesale and retail trade.
"This shift in focus towards domestically oriented services sectors is here to stay, reflecting not just the weakness of the export sector since the global financial crisis, but also the impact of policy, as the government has actively encouraged the development of more domestically oriented sectors," he wrote, adding that trend productivity growth in the services sector has come down and will likely be constrained in the future.
Mr Wan also flagged the possibility of Singapore's manufacturing sector growing less important to the economy given decreasing competitiveness as the nation's real effective exchange rate outperformed regional currencies as well as the soft performance in the electronics sector, which constitutes about a third of manufacturing output.
If this scenario plays out, it could further hamper productivity growth, given that productivity levels in the manufacturing sector outpace that of most services sector, he suggests.
On the other hand, a different or new industry could also emerge to pick up the slack from manufacturing, he acknowledged.
And while the government is working towards raising the labour force participation rate by trying to attract older workers and homemakers, this is unlikely to make up for the impact of manpower policy changes on the foreign workforce growth rate.
In addition, there may be an ill-fit in the types of jobs that need to be filled and the jobs that Singaporeans want to do.
"There are also significant mismatches between the expectations of the local workforce compared with foreign workers," Mr Wan said.
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