A new report has found that the results of Singapore's efforts to raise productivity growth to 2 to 3 per cent and rely less on foreign labour have been less than stellar so far.
The report comes as the Republic reaches the halfway mark of its economic restructuring agenda.
Nomura Global Markets Research analysts warn the lack of success to date could further dampen growth, which has already shrunk to 3.8 per cent since restructuring efforts began in 2010, to 2.1 per cent over the following five years.
Analysts Euben Paracuelles and Brian Tan said productivity growth is not expected to pick up in the next few years because of falling global growth, a rapidly ageing population and tightening financial conditions when the United States interest rate hiking cycle starts.
That may result in debt-servicing problems as household and corporate debt levels here are already relatively high - at 75.3 per cent and 78 per cent of gross domestic product (GDP), respectively.
Further, sharply higher domestic interest rates could have repercussions on the broader economy if they lead to a protracted downturn in the property market.
If productivity growth remains sluggish, it could mean that restructuring is unlikely to be completed by the end of the decade and an unexpected recession could even derail this effort, they warned.
Nomura attributed the drop in productivity to a higher employment share of lower-productivity sectors, as well as increased hiring of part-time and older workers, who tend to be lower-skilled.
Other factors include rising costs amid higher global economic uncertainty, leaving little impetus for firms to invest in productivity-enhancing capital despite various government schemes.
"It seems to us that the failure of the restructuring drive to lift productivity growth has to do with implementation. The take-up of various schemes to help firms improve productivity has not been widespread," Nomura said.
Smaller firms, in particular, seem to have struggled to invest more or overhaul their work processes while trying to stay afloat as costs mounted once restructuring began.
Tepid foreign demand has made restructuring efforts more difficult.
"With net exports accounting for 20 to 30 per cent of real GDP, it is very difficult for Singapore to completely decouple from the softness in foreign demand... This in turn probably limited the extent to which firms could raise prices to restore profit margins," Nomura said.
The rise in unit labour costs may force firms to raise prices, stoking concerns over stagflation, or structurally higher core inflation despite lower economic growth.
All this will have important policy implications, it said.
"Fiscal policy is likely going to be a constant balancing act, with the Government likely to stay the course in restructuring, incurring more fiscal costs. We expect the Government to run smaller fiscal surpluses annually and over the medium term raise more revenues, making higher tax rates for the upper-income income brackets likely," Nomura said.
Despite slowing GDP growth, the outlook for Singapore corporates may not be as bleak. More than 50 per cent of the firms' revenues are derived overseas, and growth in the rest of the region is likely to offset pressure on their overall earnings.
