Restructuring drag to keep domestic growth muted in 2H

The GDP upside is no cause for joy.

Despite the surprising upside in Singapore’s GDP for the second quarter, the country will continue to experience lacklustre in the second half of the year on the back of wage pressures and economic restructuring.

Analysts from DBS, OCBC and HSBC agree that the services sector will continue to exert pressure on the economy, as the services sector continues to weather headwinds from the labor crunch.

“Despite the prospect for a modest recovery in the manufacturing sector, the slowdown in services growth continues to present itself. This is largely due to the labor constraints in the form of foreign manpower curbs, and likely to drag selected labor-intensive services segments, particularly retail trade, transportation & storage, and accommodation & food,” stated a report from OCBC.

Meanwhile, a report from DBS cautions that “Traditionally the most stable engine of growth, the services sector has seen its growth momentum sliding in recent quarters. Growth slipped to 1.7% YoY for the quarter, down from 3.8% four quarters ago. The existing labour crunch is taking a toll on this relatively more labour intensive sector. This comes against the backdrop of the economic restructuring, which saw the steady tightening in foreign labour policies. There is a risk that the services sector continues to slow in the coming quarters owing to the labour crunch.”

“But overall growth will remain constrained by the structural rebalancing process. This entails building Singapore into a higher-productivity, knowledge-based economy, and the rebalancing process will take some time as firms continue to adjust to curbs on foreign labour. The latter has resulted in unit labour costs reaching a record high at the end of 1Q14,” warned HSBC.