The surge in productivity growth last year was driven mainly by external demand and economists are doubtful about its sustainability.
SINGAPORE: Labour productivity growth in 2017 may have risen to its highest in seven years, but the consensus appears to be that Singapore’s goal to boost productivity remains a “work in progress”.
According to data released by the Ministry of Trade and Industry (MTI) on Wednesday (Feb 14), overall labour productivity grew by 4.5 per cent last year. That marked the quickest productivity growth since 2010, which saw a spike as the economy recovered from the global financial crisis, and a huge improvement from the 1.8 per cent in 2016.
Overall labour productivity is measured on a per hour worked basis, otherwise defined as real value-added (VA) per actual hour worked (AHW).
Singapore has been working to push up its productivity levels for years, given that it forms a key part of the equation in ensuring sustainable wage rises and economic expansion as the country’s workforce growth slows. Economic growth comprises both manpower growth and productivity growth.
For 2017, the productivity growth spurt was largely due to productivity gains in externally-oriented sectors, such as manufacturing, wholesale trade and finance and insurance, MTI said in an article released alongside the 2017 Economic Survey of Singapore.
Productivity in these sectors jumped by 6.7 per cent last year, partly due to the cyclical upturn in the global economy. Firms in externally-oriented sectors also tend to be “incentivised to optimise operations and seek efficient production methods to remain competitive”.
On the other hand, productivity in domestically-oriented sectors dipped 0.2 per cent.
Correspondingly, externally-oriented sectors contributed 4.2 percentage points to overall productivity growth, while domestically-oriented sectors accounted for negative 0.5 percentage points.
Also helping to lift productivity growth, more productivity sectors, including finance and insurance, increased their AHW shares at the expense of less productive sectors, such as construction, said MTI.
The AHW share of a sector can increase if the employment share of the sector grows or if the AHW per worker rises relative to other sectors. For instance, the construction sector saw a decline in AHW share last year as the shedding of foreign workers among firms led to a fall in the sector’s employment share.
But given how productivity gains were mainly fuelled by the externally-oriented sectors, Singapore’s productivity push remained a “work in progress”, said MTI’s permanent secretary Loh Khum Yean.
“It’s an ongoing journey for us to take the structural steps and reforms needed to improve productivity, especially for the domestically oriented sectors”.
Economists echoed that view.
While the services sector could be seen picking up some slack in the fourth quarter as manufacturing growth slowed, the main driver for productivity growth remains the latter on the back of a pick up in global business cycles,” said DBS economist Irvin Seah.
CIMB’s Song Seng Wun described the productivity growth spurt for 2017 as an “outlier”.
“Simply put, it’s about factories, which were less busy in the past two years suddenly becoming busier with orders, so it looked like we had a sharp improvement in productivity. It’s mostly that, instead of factories implementing new effective ways of production.”
“We get this kind of upswing every time there’s a sharp rebound in external demand,” he added.
Apart from a rise in output, a contraction in manufacturing employment also contributed to the sector’s strong productivity growth, noted OCBC’s head treasury research and strategy Selena Ling.
On whether this productivity jump could be sustained, Mr Song said much will depend on external demand in 2018 as downside risks, such as protectionist sentiment, remain.
“If growth comes in again at the higher end of expectations due to global demand remaining robust, then we may find Singapore’s productivity growth staying positive or coming close to what we have in 2017.”
Ms Ling is expecting “some moderation” in the overall labour productivity figures this year as “the manufacturing momentum is starting to fade”.
She added: “If you look for a longer-term track record, we are obviously nowhere near the 1 to 2 per cent productivity growth per annum yet so that means this is still a work in progress.”
To be sure, MTI recognised this and noted in its report that “there continues to be a need to press on with sectoral restructuring and transformation efforts” in order to support productivity-led growth. In particular, the implementation of the Industry Transformation Maps (ITMs).
Given the lopsided nature of productivity growth, UOB economist Francis Tan wrote in a note emphasising the importance for Budget 2018 to contain “more tools and resources to help improve the labour productivity of the service sectors”.
Said Ms Ling: “We do look for some of the ITMs to be implemented and hopefully, that will transform some of the industries.”
“What we’ll be looking for is more sustainable productivity growth based on structural changes, meaning that firms cut down on their dependency on foreign workers, invest in the right type of technologies, revamp their business processes to create value and also move to new markets,” she told Channel NewsAsia.
“This will set the basis for more sustainable productivity growth for a lot of the SMEs (small- and medium-sized enterprises) moving forward.”
Additional reporting by Dylan Loh.
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