Alcotec Precision Engineering owner Colin Kua turned down almost a third of his customers' orders last year as he grappled with Singapore's labour shortage. This year may be tougher.

"In the future, it may be worse; to venture out to other countries may be the only solution," said Mr Kua. He had to cut the number of foreign employees making items from sockets to semiconductors by half as the Government tightened the inflow of overseas workers. "We don't really dare to bring in more orders because the manpower isn't enough."

Singapore's move to reduce its reliance on cheap overseas labour and boost productivity is crimping the ability of manufacturers like Mr Kua.

The fallout puts Singapore at risk of losing out as overseas demand strengthens this year, with recoveries in the US and Europe spurring the International Monetary Fund to say it will raise its global growth forecast.

The impact of those policies, ranging from higher levies for overseas labour to tighter limits on non-Singaporeans in some industries, may become more apparent this year as the economy loses some of the manufacturing capacity that helped boost exports and growth in past recoveries.

"This manufacturing recovery that we're all hoping for seems to be sputtering again," said Bank of America economist Chua Hak Bin.

"Foreign-worker restrictions will be tightened further in July. We think Singapore may not be able to fully capitalise on a global demand upswing because of these constraints."

Manufacturers including Western Digital have moved operations to neighbouring countries.

Singapore's exports declined in nine out of 11 months last year, faring worse than neighbours from South Korea to Malaysia.

Manufacturing output shrank in the fourth quarter from the previous three months, and has grown at about 60 per cent the pace of the services industry in the past two years as companies struggled to expand, data compiled by Bloomberg shows.

"The restructuring has diluted our overall competitiveness," said Mr Irvin Seah, an economist at DBS Group Holdings in Singapore.

"It's not just higher labour costs but it's also the labour crunch, because when you don't have enough workers, how are you going to meet that order?"

Manufacturing accounted for 19.9 per cent of Singapore's gross domestic product in the third quarter of last year, down from nearly 21 per cent in the same period two years earlier. The sector's share was 27.3 per cent in 2005, official data shows.

There is a lag as labour-intensive factories relocate and new industries the island is keen to attract - from aerospace to research and development - take time to replace them, according to Mr Vishnu Varathan, an economist at Mizuho Bank.

"The Government is trying to do what it can to help with productivity," said Mr Kurt Wee, president of the Association of Small and Medium Enterprises. "This productivity drive takes time; I'm not so confident the companies can ramp up productivity so fast."

Sigma Cable began using contract manufacturers to make about 30 per cent of its products from early last year.

Those who have not changed their strategy to account for fewer workers are suffering, according to deputy general manager Samuel Peh. "The demand for our sector is improving because our neighbouring countries are doing quite OK," he said. "I can see my competitors, their hands are really tied."

Compounding their woes is the Singapore dollar, which was the best performer last year among five major South-east Asian currencies tracked by Bloomberg, weakening only about 3.3 per cent against the US dollar.

"They have accepted that in the next three to five years while they are trying to pursue productivity gains, they will see softer growth," said Mr Varathan. "They're not going to compensate for the manufacturing gaps and the restructuring issues by letting the Singapore dollar weaken and hence temporarily boost exports."

Alcotec's Mr Kua said he lost business last year after he told customers that orders which earlier took 10 days to fill would take up to five weeks.

"We are doing more overtime," Mr Kua said. "We've got to work Saturdays, Sundays, but we still can't solve the problem."