Worsening inflation seen as Singapore snubs foreign labour

It’s going to be a shaky short term.

Singapore's plans to cut reliance on foreign workers could reduce its competitiveness and growth potential while keeping core inflation elevated, the International Monetary Fund said in a report on Saturday.

Reuters reports that the IMF said Singapore's plans to restructure its economy by trying to boost productivity and curb use of cheap foreign labour could eventually set the stage for a long period of sustainable growth.

"However, productivity improvements might take some time to materialize and may not fully offset the effects of declining labor force growth," the fund said in its annual review of economic developments and policies in the country.

Reuters adds that Singapore's measures have led to a tight labour market and wage growth that have helped fuel core inflation. The Monetary Authority of Singapore this week maintained its stance of allowing a gradual appreciation of the currency to try and keep core price pressures in check.

The Fund said Singapore's strong external trade position - its current account surplus was 18.3 percent of GDP in 2013 - seemed to be stronger than fundamentals justify and the government needed to keep up efforts to boost consumption.

Here’s more from Reuters:

The IMF's executive board of directors said the country's dependence on trade flows left it particularly vulnerable to a slowdown in the growth of trading partners as well as to global financial market volatility.

"They stressed the need for continued vigilance to risks and spillovers in the financial and housing sectors, and further efforts to promote external rebalancing, address demographic challenges, and reduce inequality," the report said, referring to the IMF board.

The report forecast real GDP growth for Singapore of 3.0 percent in both 2014 and 2015 and saw core inflation rising to 2.4 percent by 2015.