Singapore braces itself for a 'very difficult' labour market transition

Is the foreign manpower target too far-fetched?

According to Credit Suisse, while inflation has moderated significantly, the most important obstacle to the central bank easing policy remains the tight labour market, in its view.

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We note that the central bank’s estimates of the output gap have had a reasonably close correlation with the unemployment rate, suggesting that the central bank typically ascribes high importance to labour market conditions in determining whether the economy is running above or below trend.

Barring adverse macroeconomic shocks, the labour market is unlikely to ease any time soon, given that there are significant government restrictions on foreign labour set to come into force over the next few years.

In addition, the government might have to do more in the way of foreign labour restrictions.

While foreign employment growth has moderated to around 5% yoy this year, from 7% yoy in 2012, we note that the economy still has some way to go before reaching the 2.5% per annum foreign employment growth rate set out in the Population White Paper.

Ultimately, it seems to us that the economy will face a very difficult transition over the next few years to one less dependent on the labour force for growth.