Singapore gears up for a long decade of muted growth as productivity woes mount

Restructuring is a bitter pill to swallow.

Singapore has resigned itself to a decade of muted growth after the government trimmed GDP growth expectations to just 2-4% until 2020.

This is a step down from the medium term growth range of 3-5% envisioned by the Economic Strategies Committee (ESC) back in February 2010 when its restructuring recommendations were published.

According to a report by DBS, the government’s growth expectations were trimmed mainly because the country's productivity woes will crimp overall GDP growth.

DBS noted that excluding a productivity rebound following the global financial crisis (GFC) in 2010, overall productivity growth averaged a mere 0.3% per year. This is a mere one-fifth the average pace of 1.5% registered between 2000-09, before the restructuring started.

"The weaker link is obviously in productivity growth. The definition of productivity, which is essentially GDP per worker, is susceptible to the global business cycle. With the Singapore economy pretty much driven by global demand, and given the sluggish global growth in recent years, productivity growth measured in that sense suffered," DBS said.

The report added that the theory that foreign manpower curbs will urge companies to grow by boosting productivity has not worked out so well in reality.

"While [the policy] limits the ability for companies to grow by merely adding more workers, it compels them to focus on improving productivity. Ideally, this should lift productivity growth. But in practice, it constraints headline GDP growth, and henceforth affects productivity gains," DBS noted.

Other factors that played into the downward revision are Singapore’s unfavourable fundamentals such as the aging population and slower resident workforce growth rate, as well as a more challenging global environment.

“The key to sustainable long term economic growth lies in ensuring productivity improvement. Rather than focusing on the supply side constraints, the emphasis in the next phase of restructuring should be on enhancing top-line growth via promoting innovation and encouraging internationalisation,” DBS said.