Singapore’s businesses continue to face cost challenges amid slower economic growth with wages remaining a top business cost challenge, says DBS Group Research economist Chua Han Teng.
On the back of a tight labour market spurred by the post-pandemic recovery and competition for talent, nominal wage growth has been elevated, adds Chua. He estimates that nominal measures have pushed about 3% above the level implied by its pre-pandemic trend by 4Q2022 after a strong recovery from 2021.
“Nominal wage levels have risen further in 2023, albeit at a slower y-o-y rate. Even if nominal wage growth is likely to moderate further due to the uncertain economic environment and cautious business hiring, as we expect, businesses would still feel the pinch of the cost pressures,” says Chua.
While consumers and workers may have received much higher nominal wage growth in 2022, this comes at a time of rapid consumer price increases. After accounting for high consumer price index (CPI) inflation, their real increments were not as high — with real wage growth slipping in 2022 versus 2021.
To continue raising Singapore’s wages and living standards sustainably, wage increases will have to be matched with productivity gains over the long term, says Chua. “Singapore will only be able to maintain its global competitiveness in a more troubled world, if real wage and productivity gains commensurate with each other,” he adds.
Despite higher real wage increases over the past few years, Singapore remains competitive versus other G7 and Asian advanced economies. Even with the significantly challenged global economy due to the emerging US-China tensions as well as the unprecedented Covid-19 pandemic, Singapore’s real productivity growth outperformed various advanced economies, according to DBS’s estimates. This supports the country’s better real wage increments.
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Throughout the pandemic period, Singapore’s productivity achievements were supported by proactive government policies and willingness by businesses to embrace them, says Chua. Policies in the budget announcements were eventually calibrated towards enhancing enterprise capabilities and upskilling workers, beyond crisis management to deal with the pandemic’s immediate fallout.
“Measures focussed on areas including digitalisation, innovation, human capital, and internationalisation, which we think have been helpful for productivity, transformation, and leveraging new opportunities,” says Chua.
“We expect continued productivity focus, such as technology adoption and skills upgrading, to sustain long-term economic growth and income gains, considering an ageing population.”
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Internationalisation potentials
Beneath Singapore’s headline productivity numbers, DBS sees huge sector disparities, although it acknowledges that this is an old issue. Productivity growth of outward-oriented sectors such as finance and ICT has performed better than domestically oriented sectors, justifying their higher real wage gains. The constant fierce global competition faced by outward-oriented companies has kept them on their toes to continuously innovate and boost efficiency.
For domestically-oriented sectors, some of them — such as construction and F&B services — were severely hurt during the pandemic. As they make up for lost ground from the pandemic, productivity improvements and eventually expansion would be needed for future sustainable wage growth.
In this regard, digitalisation and skills training initiatives to embrace new technologies in the food services and built environment Industry Transformation Maps refreshed in 2022 are likely to provide impetus for productivity upgrades, Chua says. Additionally, the expansion of the progressive wage model to food services from March would also help to uplift the incomes of lower wage workers through climbing the skills ladder.
Meanwhile, in DBS’s view, efforts by Singapore’s businesses to internationalise will not only bring revenue growth opportunities; the resulting competition and partnerships from overseas expansion have the potential to lift their productivity via exposure to new innovative ideas. Given Singapore’s very open economy, businesses are already exposed to the global environment and therefore should set their sights beyond the domestic market, Chua points out.
“Indeed, Singapore’s businesses are increasingly looking to internationalise in the post-pandemic era. 2,000 enterprises embarked on internationalisation activities in 2022, 25% higher than in 2021, according to Enterprise Singapore.
“Their plans are also reflected in the Singapore Business Federation National Business Survey 2022/2023, where 65% of the respondents have overseas expansion plans, jumping from 40% in the previous year’s survey. Interestingly, a higher percentage of small and medium enterprises is looking outwards versus large enterprises, despite their resource constraints,” he notes.
