In its half-yearly macroeconomic review released on April 26, the Monetary Authority of Singapore (MAS) warned that the country is entering a “slower long-run growth path” characterized by rising costs. The MAS emphasized that as resource constraints and cost increases become more pronounced, Singapore will need to confront the reality of this new economic trajectory.

Historically, Singapore has maintained robust economic growth without a corresponding surge in unit labor costs. However, the MAS cautioned that this trend is becoming increasingly difficult to sustain. Over the years, Singapore has achieved remarkable growth through significant capital accumulation, although improvements in total factor productivity (TFP) have also played a role, albeit to a lesser extent.

Since 2010, the MAS has observed a significant shift in Singapore’s capital stock towards information and communications technology (ICT). This transition has significantly contributed to real GDP growth, accounting for nearly 50% from 2020 to 2023, which is double the global average and comparable to other advanced economies such as the United States. Furthermore, the enhancement in labor quality has supported TFP growth, contributing nearly a quarter to real GDP growth during the same period.

Despite these achievements, the MAS noted that overall average monthly earnings have increased by about 60% since 2010. However, gains in labor productivity have helped mitigate the rise in wage costs, resulting in a 30% increase in unit labor costs. In contrast, unit business costs have surged by approximately 65% over the past decade, partly due to rising international prices rather than domestic constraints.

Moving forward, the MAS warned that sustaining the relatively benign growth-cost dynamic will become more challenging. The global economy is likely to encounter cost pressures driven by supply-side constraints, which could lead to higher import prices for Singapore. Additional pressures will arise from geoeconomic fragmentation and the necessity to diversify supply chains alongside the ongoing energy transition.

The MAS also indicated that domestic labor costs, particularly in lower-productivity sectors, are expected to climb due to tightening labor constraints. Although high productivity in the tradable sector typically correlates with high wages and prices in the non-tradable sector, Singapore has yet to see this effect strongly manifest. However, as labor constraints intensify, wages and prices in the non-tradable sector are likely to rise more rapidly compared to other nations, reflecting the true resource costs of essential goods and services.

Despite the anticipated rise in costs, the MAS contended that higher costs need not undermine competitiveness. In fact, the authority suggested that rising wages, supported by technology-enabled productivity growth, could create a virtuous economic cycle. Ultimately, the MAS concluded that Singapore must continue to cultivate openness, dynamism, and innovation as crucial elements to sustain TFP gains in the long term.