Moody's Investors Service says that economic growth in Singapore has reached a tipping point, and significant productivity gains are key to restoring robust GDP growth.
Between 2000 and 2010, Singapore's GDP grew by an average pace of 6.2%, higher than the median of 2.1% for Aaa-rated economies, but also one of the most volatile. Since then, growth has cooled, with the economy expanding 2.0% in 2015.
Moody's notes that Singapore now faces the challenge of sustaining growth and raising median incomes in a spatially constrained economy with no natural resource base and a limited workforce. Over the medium to long term, Moody's expects that Singapore's growth is likely to converge with, and stay in line with its Aaa peers, although trends will remain highly volatile.
Moody's conclusions are contained in its just-released Issuer In-Depth report, "Government of Singapore: Productivity Gains Crucial to Restore Robust Growth."
The government has been striving to increase productivity through a ramp-up in skills and innovation capabilities, while calibrating its dependence on foreign labor.
Compositional changes in Singapore's economy will have mixed implications for the government's efforts to productivity growth. Similar to developments in other mature economies, economic progress in Singapore has brought with it a steady fall in the share of manufacturing in GDP, while that of services is rising.
Moody's notes that manufacturing has been observed to be a stronger driver of overall productivity in many countries, so the shift to the service sector as a growth engine could make it more difficult to achieve the government's targets for improving productivity.
On the other hand, the growing interdependence between the manufacturing and services sectors suggests that Singapore's case may be different, and the shift to services need not arrest productivity growth.
As a wealthy, well-diversified and highly competitive economy with spatial and labor force constraints, the city state has a lot in common with several other Aaa-rated sovereigns, such as Denmark, Sweden and Switzerland.
Since Singapore already enjoys higher per-capita incomes than most Aaa-rated sovereigns, stimulating labor productivity will be challenging in the absence of a meaningful expansion in the skilled workforce, or labor and product market reforms.
