Singapore's wage growth to inch higher to 3%

Cost pressures high on services sector.

According to the Monetary Authority of Singapore, turning to domestic sources of inflation, cost pressures will continue to emanate from the labour market.

Labour demand is likely to remain firm as employers step up hiring alongside the pickup in economic activity.

At the same time, the cumulative effects of the tighter foreign labour policy over the past three years will be felt more acutely in 2013, thereby keeping the labour market tight while contributing to the increase in labour costs.

As such, wage growth is anticipated to pick up from 2.3% in 2012 to around 3% in 2013. Similarly, ULC will rise further, following an average 4% increase in the preceding two years, as wage growth continues to outpace productivity gains in the near term.

The impact of rising labour costs will, however, vary across sectors. Notably, the effects will be stronger in the services sector, particularly in consumer services such as food & beverage, healthcare and education services, as manpower costs constitute a larger proportion of their total operating outlay.

Apart from labour cost, other operating expenses could increase. Although retail space rentals were broadly  stable through 2012, firms’ actual leasing cost would have risen if the lease was up for renewal.

For instance, a shop space lease that was renewed in Q4 2012 after three years could have seen a rental increase of around 5%, which is the accumulated rise in rentals over 2010–12.

Given that profit margins, as proxied by the mark-up on ULC, are currently at unusually low levels, firms are likely to partially restore them by passing
on some of the cost increases to consumers. Taking into account all these factors, services inflation will rise in H2 this year, though still remain slightly below the 2010–11 average.