Singapore’s economy will experience “modest” expansion this year as a tight labor market constrains some industries amid improving global demand, the government said after growth exceeded initial estimates last quarter.

The city state maintained its 2014 growth and export forecasts even as manufacturing gains helped gross domestic product rise an annualized 2.3% in the three months through March from the previous quarter, more than an April estimate of a 0.1% expansion, a report showed today.

Singapore is nearing the midpoint of a 10-year economic transition strategy to reduce its dependence on cheap overseas workers while attracting new industries such as research and development. The Southeast Asian nation, whose trade-dependent economy is vulnerable to fluctuations in global demand, expects recoveries in the U.S. and Europe to support growth even as China’s expansion cools, the trade ministry said today.

“The tighter labor market should place a cap on the manufacturing sector,” said Daniel Wilson, an economist at Australia & New Zealand Banking Group Ltd. in Singapore. “At the margin, the gain from an externally led services rebound is still less than the gain that would accrue from an unconstrained manufacturing sector.”

CURRENCY POLICY

The Singapore dollar fell 0.1% to 1.2513 against the U.S. currency at 9:53 a.m. local time today. The central bank, which uses the island’s dollar to manage price pressure, said last month it will maintain a modest and gradual appreciation of the currency.

Elsewhere in the region, Indonesia’s economy grew 5.21% last quarter from a year earlier, missing analysts’ estimates, while Malaysia last week reported a better-than- estimated 6.2% expansion.

Singapore Prime Minister Lee Hsien Loong’s government has tightened the hiring of foreigners in recent years after an influx led to voter discontent over infrastructure strains and increased competition for jobs, property and education.

“Continuing tightness in the labor market is expected to weigh on growth in some labor-intensive sectors,” the trade ministry said. While a gradual improvement in the global economy will help manufacturing and wholesale trade support growth, an unexpected increase in the pace of the Federal Reserve’s exit from stimulus or unintended effects from China’s efforts to rein in credit growth pose risks, it said.

REVISED DATA

GDP climbed a revised 6.9% in the fourth quarter from the previous three months, today’s report showed. The data was calculated using 2010 prices as a base, instead of 2005 used previously. First-quarter expansion exceeded the 1.2% median estimate in a Bloomberg News survey of 13 analysts, conducted before the government said it had changed the base year.

The revised GDP formula takes into account new elements including the capitalization of research and development expenditure and employers’ pension contributions. The methodology was last changed in 2010.

The economy expanded 4.9% in the first quarter from a year earlier, after growing a revised 4.9% in the previous three months, the trade ministry said today. The median estimate in a Bloomberg survey was a 5.5% gain.

The Singapore government today reiterated its forecast for the economy to expand 2% to 4% this year, and for non-oil domestic exports to increase between 1% and 3%.

The island’s manufacturing grew 11.9% in the first quarter from the previous three months, compared with an April estimate of a 4.5% expansion. Services rose 0.4% in the same period, while construction increased 0.6%.

“It’s the manufacturing sector that is the key driver behind the revision,” Michael Wan, a Singapore-based economist at Credit Suisse Group AG, said before the report. “The second half of this year should be the period where growth picks up much more strongly, not just for Singapore but also across the Asia region, on recoveries in the U.S. and Europe.”