Singapore is on a course toward "slower long-run growth" due to increasing costs, according to the Monetary Authority of Singapore (MAS) in its half-yearly macroeconomic review released on Friday, April 26. The central bank indicated that resource limitations and higher costs will likely become more pronounced in the future, impacting the nation's economic growth.

MAS highlighted that the key to Singapore's future steady-state growth rate lies in total factor productivity (TFP) improvements. Historically, Singapore has achieved remarkable growth while keeping costs in check. However, MAS noted that this trend may not continue indefinitely.

Strong Growth History Over the years, Singapore's robust economic growth has been driven by significant capital accumulation and, to a lesser extent, TFP gains. Since 2010, the country's capital investments have increasingly focused on information and communications technology assets, contributing almost 50 percent to real gross domestic product (GDP) growth between 2020 and 2023. This proportion is twice the global average and on par with other advanced economies like the United States.

Improvements in labor quality have also supported Singapore's TFP growth, accounting for nearly a quarter of real GDP growth between 2020 and 2023, again doubling the global average. Despite the steady GDP growth, business costs have remained relatively moderate, with unit labor costs rising by about 30 percent and unit business costs increasing by about 65 percent over the past decade.

Challenges Ahead Going forward, MAS anticipates greater challenges in sustaining Singapore's "relatively benign growth-cost path." Global factors, including higher import prices, geoeconomic fragmentation, diversifying supply chains, and energy transitions, will likely drive cost increases. Domestically, labor costs are expected to rise, especially in lower-productivity sectors facing tight labor constraints.

MAS noted that countries with high productivity in the tradable sector often experience higher wages and prices in the non-tradable sector, but this has not been as pronounced in Singapore. However, this could change as resource constraints lead to a more significant rise in wages and prices in the non-tradable sector.

To manage rising costs, the tradable sector must continue to move toward higher value-added activities within the global value chain. For non-tradable sector companies, passing on costs may be more challenging, prompting a shift toward offering higher-quality, differentiated goods and services.

MAS pointed out that higher costs don't necessarily undermine competitiveness. Instead, higher wages driven by technology-enabled productivity growth could create a "virtuous cycle" for the economy. The report concluded that Singapore should remain open to innovation and maintain a dynamic business environment to sustain TFP gains in the long term.