Companies here have been investing less in fixed capital such as equipment and intellectual property, owing largely to the uncertain economic outlook.
The reduced investment has weighed on short-term economic growth, according to research released yesterday by the Ministry of Trade and Industry (MTI).
If the decline persists, the economy's future productive capacity will be affected, MTI economists also warned.
The research, released alongside MTI's quarterly Economic Survey of Singapore, found that real gross fixed capital formation contracted 1 per cent last year and 2.6 per cent in 2014, after 10 years of growth.
Gross fixed capital formation consists of private- and public-sector investments in fixed assets. It includes constructing buildings and infrastructure, transport equipment, machinery and intellectual property.
The declines in 2014 and last year were due mainly to a contraction in private sector investments, which account for 80 per cent of gross fixed capital formation.
In particular, investment in machinery and equipment, which make up about a quarter of private sector gross fixed capital formation, fell by 1.3 per cent in 2014 and 2.7 per cent last year.
MTI economists noted that this phenomenon is not unique to Singapore - such investments have declined in many advanced economies in recent years.
Heightened global economic uncertainty was the biggest contributor to the drop in private machinery and equipment investments here in 2014 and last year, their research showed.
The cyclical downturn in manufacturing is also weighing on sentiment among firms in Singapore and translated into lower levels of investment over the two years.
In the longer term, the Singapore economy's shift away from manufacturing towards the less capital-intensive services sector may also affect private investments in machinery and equipment.
These trends are expected to continue weighing on private sector investments in the near term, said the MTI economists.
DBS economist Irvin Seah said the contraction in real gross fixed capital formation over 2014 and last year is worrying, especially since Singapore is in the midst of restructuring its economy.
"Despite all the resources which have been channelled into upgrading technology in a bid to boost growth, there has been a broad-based decline in investments. It's a worrying trend," he noted.
Separately, the MTI released research showing that firms entering the manufacturing sector were, on average, more productive than firms that shut down over the 1999 to 2013 period.
This effect, combined with the reallocation of workers into more productive firms, helped lift productivity growth in the manufacturing sector from 2009 to 2013, the most recent period studied.
This article was first published on May 26, 2016.
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