Why Singapore could be suffering from a 'labour supply shock'

Foreign labour continues to tighten.

According to Morgan Stanley, not only is Singapore contending with secular global demand shock, it is also contending with domestic issues of its own – essentially “a labour supply shock”.

"An ageing population and a need to wean the economy from dependence on foreign labour given infrastructure/political constraints means that policymakers have undertaken steps to slow down the growth of foreign labour.

To the extent to which an aggressive immigration policy had lifted labour inputs and driven growth," says Morgan Stanley.

Here's more:

Our upward revision to 2013 takes into account a stronger-than-expected 1H13 GDP growth and the carry over effect this may have on 2H13 GDP growth.

Our downward revision for 2014 incorporates the downward revision that the global team envisages for EM economies as markets adjust to a less easy Fed policy.

Moreover, the exogenous tightening is also likely to take the wind out of the previously strong credit growth cycle in Singapore.

Our thesis on Singapore remains broadly unchanged. The economy is transitioning from a “Goldilocks” period of high growth and extremely benign inflation seen in the run-up to 2007, to one in which growth is likely to settle at a newer lower normal whilst inflation is likely to trend higher.

This is both due to global developments and idiosyncratic issues at home. On the growth front, growth has trended down from 8.5% CAGR seen in 2004-2007 to what looks likely to be a 3%-4% range going forward.

Indeed, macro-rebalancing (first in DM and now also EM) point to a global growth which would be significantly lower than the 5% CAGR seen since 2004-2007.

MS Global economics team expects 2013/2014/2015 global GDP growth at 2.9%/3.5%/3.7% respectively.

Given that domestic demand is hardly domestic in nature for the small open economy, the spillover growth implications for Singapore are already being felt.