SINGAPORE faces a “slower long-run growth path” with higher costs, the Monetary Authority of Singapore (MAS) said in its half-yearly macroeconomic review on Friday (Apr 26).

“As resource constraints and cost increases become more binding in the years to come, Singapore will likely have to confront the eventuality of its slower long-run growth path.”

This new steady-state growth rate will largely depend on total factor productivity (TFP) gains, added MAS.

Good old days

Singapore has managed to achieve strong growth while keeping costs relatively contained, but this will not last forever.

MAS noted that over the decades, Singapore has managed “an exceptional pace of growth” through strong capital accumulation and, to a lesser extent, TFP gains.

On capital accumulation, MAS noted that Singapore’s capital stock has shifted towards information and communications technology capital assets since 2010.

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These contributed almost 50 per cent to real gross domestic product growth from 2020 to 2023, double the global average and broadly comparable to other advanced economies such as the US.

Meanwhile, a steady improvement in labour quality has supported Singapore’s TFP growth, with labour quality contributing close to a quarter of real GDP growth in 2020 to 2023. This is also double the global average.

“The firm pace of GDP growth in Singapore has so far taken place alongside a measured increase in business costs,” said MAS.

Since 2010, overall average monthly earnings have risen about 60 per cent. But improvement in labour productivity has mitigated the rise in wage costs, with unit labour cost up 30 per cent.

The unit business cost has risen more, by about 65 per cent over the past decade.

Rather than being due to domestic factor constraints, these cost increases partly reflect the rise in international prices, said MAS.

Tougher times ahead

Singapore has generally managed to sustain real growth per capita “without a commensurate increase in unit labour cost”, in contrast to rising unit labour costs in advanced economies such as Europe and the US.

But sustaining this “relatively benign growth-cost path” will become more challenging, said MAS.

The global economy will likely face cost headwinds, as growth is increasingly constrained by supply-side issues. Singapore could face higher import prices as a result. Other cost pressures will come from geoeconomic fragmentation and diversifying supply chains, as well as energy transition.

Domestically, labour costs and unit labour costs are also expected to climb, especially for lower-productivity sectors with the tightest labour constraints.

MAS noted that countries with high productivity in the tradable sector tend to have high wages and prices in the non-tradable sector – but this effect has not been strong in Singapore.

In Singapore, wages and prices in the non-tradable sector remain significantly lower. However, this is set to change.

“Going forward, as labour constraints become more binding, wages and prices would likely have to rise more quickly relative to other countries, to more accurately reflect the true resource costs of producing essential non-tradable goods and services, against growing demand,” MAS said.

The tradable sector should be able to cope with rising costs if it keeps moving towards higher value-added parts of the global value chain, said MAS.

But companies in the non-tradable sector may be less able to pass on costs. With the rise in wages, businesses may offer higher-quality, differentiated goods and services.

Higher costs do not necessarily preclude competitiveness, MAS added. Instead, higher wages as a result of technology-enabled productivity growth “can place the economy in a virtuous cycle”.

Singapore should “cultivate and sustain openness, dynamism and innovation, as necessarily supporting factors for continued TFP gains over the long term”, it concluded.