THE productivity drive currently under way in Singapore has been taking a toll on local businesses in recent years as the resulting shortage in labour pushes up wage costs.
But the pain is now starting to show up more clearly in the country's overall economic figures as well. The economy grew 4.9 per cent in the first three months of the year over the previous year, and 2.3 per cent over the preceding quarter - better than economists' expectations, according to the latest figures released on Tuesday last week.
Most of the growth, however, was driven by an unexpectedly strong bounce in the volatile segments of manufacturing, the figures showed. The sector as a whole grew 9.8 per cent in the first quarter over a year earlier, accelerating from 7 per cent in the previous quarter.
In contrast, domestically oriented industries such as services, which makes up about two-thirds of the economy, turned in slower expansion. The service sector grew 4.4 per cent in the first quarter from the previous year, down from 5.5 per cent in the fourth quarter of last year, data showed.
"Service growth moderated much more quickly than we anticipated," said Bank of America Merrill Lynch analyst Chua Hak Bin.
Part of the reason for the slower growth is likely the manpower crunch in services dragging down expansion, said Citi economists Kit Wei Zheng and Brian Tan.
"The more domestically and regionally oriented sectors like construction and restaurants and accommodation... performed more poorly likely due to labour shortages as well as demand weakness," they said last week.
"The first quarter (growth) data suggests restructuring is taking a toll despite tentative signs of better G-3 demand," they added, referring to the United States, Europe and Japan.
CIMB economist Song Seng Wun said while some of the lower growth in service segments, such as financial services, could be due to labour constraints, the main drag was a slowdown in "sentiment-sensitive" activities such as stock market transactions and bank loans.
Still, the shift in Singapore's growth approach towards higher productivity, rather than endless labour force expansion, may mean it is less able to ride on the nascent pick-up in the global economy due to the tight labour market.
Signs of improving global growth emerged last week as an indicator of China's factory activity rebounded faster than forecast, while manufacturing in the US and Japan also beat expectations.
HSBC's purchasing managers' index (PMI) for China rose from 48.1 last month to 49.7 this month, nearer the 50 threshold that separates expansion from contraction in the factory sector. Economists had expected a reading of 48.3. The PMI for the US rose to 56.2 this month, up from 55.4 last month, while Japan's PMI climbed to 49.9 from 49.4 in the same period.
Dr Chua said "restructuring and stricter foreign worker restrictions are reducing Singapore's capacity to capitalise on stronger global growth". He added that despite the stronger than expected growth in the first quarter, the Ministry of Trade and Industry (MTI) refrained from upgrading its full-year forecast of 2 per cent to 4 per cent growth.
This was "probably in part because of these domestic labour constraints", he said.
Meanwhile, the labour crunch and higher wage costs are continuing to fuel rising consumer prices.
Singapore's core inflation, a measure of inflation that excludes housing and private road transport costs, rose to 2.3 per cent last month, from 2 per cent in March, data last Friday showed.
This inflation figure, a better gauge of the everyday cost of living, was pushed up by higher service, food and retail costs.
Service inflation accelerated to 2.7 per cent last month from 2.4 per cent in March, while food inflation increased to 3.1 per cent from 2.9 per cent.
Retail items also added to overall inflation, as clothing and footwear prices rose for the first time in five months, MTI and the Monetary Authority of Singapore said.
Said UOB economist Alvin Liew: "Domestic cost pressures from the tight labour market remain the key source of inflation... as firms are expected to pass the increases in business costs on to consumer prices."