A cloud over economic growth prospects

SINGAPORE - Singapore's worst-ever haze is casting a pall over not only its skyline, but also the prospects for its economic growth this year.

Economic watchers are starting to total up the possible damage to the Republic's economy after Prime Minister Lee Hsien Loong last week raised the possibility that the haze might last for several weeks or more.

"The main thing to watch will be the duration of the haze. If it continues through to end-August, when the dry season is likely to end, then the cumulative impactwill be quite large," said UOB economist Francis Tan.

He estimates that if the haze lasts for most of the third quarter, that could shave off 0.3 to 0.5 percentage point from his current forecast of 3 per cent economic growth this year.

This forecast is on the high side of the Government's official tip of 1 to 3 per cent growth.

A 0.3 percentage point cut in Mr Tan's projection works out to about $1.1 billion in real gross domestic product, he said.

Using another measure, Barclays economist Joey Chew suggests any estimate of the haze's cost should start at $300 million a month, which works out to about 1 per cent of monthly GDP.

This would be the loss if tourism revenue declines 10 per cent and retailers and dining joints lose another 10 per cent in domestic sales, Ms Chew said.

"The costs escalate if the situation starts affecting construction and other parts of manufacturing," she added.

"Our initial assessment is the haze could have quite a limited impact on the economy, but the situation is fluid now and it's hard to tell."

The sectors likely to be worst hit are tourism and services, as people stay indoors just as Singapore gears up for the annual summer holidays and the Great Singapore Sale.

"We are already seeing high levels of complaints from visitors and people starting to leave early," said PwC partner See Hong Pek.

"If the haze continues, this will be felt further through cancellations and, in a worst-case scenario, flight cancellations or re-routing."

For every potential tourist who avoids Singapore, the economy will lose $1,500 - the estimated average tourist expenditure here, said CIMB economist Song Seng Wun. Tourism makes up 5 to 6 per cent of a year's economic output. If the smog lasts, the impact will also spread to other "outdoor" industries such as construction and ship building, Mr See said.

Construction accounts for about 7 per cent of GDP, while transport engineering - which covers aerospace, marine and offshore engineering and land transport - makes up another 3 per cent.

Then there is the indirect impact on economic activity as people modify their usual behaviour as a result of the haze, said DBS economist Irvin Seah.

"If schools and childcare centres have to be closed, workers with children will have to go on leave, on top of those taking medical leave," he said.

Health-care costs will increase and productivity will suffer as a result of people taking leave, working less efficiently or leaving work earlier, added Mr Paul Kent, director of economics and regulation, at KPMG in Singapore.

One way to gauge the impact of the ongoing haze on the economy is to compare it to previous smog situations.

The 2006 haze was estimated to have cost US$50 million (S$64.3 million) while the cost of the 1997 haze was put at US$300 million, brokerage CLSA said in a report. It added that those estimates seemed low when taking into account both the direct and indirect costs of the haze.

In any case, most economists agree that the haze will prove more expensive to Singapore's economy this time.

"The cost will most likely be worse than in previous episodes given the relative severity of the air pollution this time," said Mr Seah.

"In addition, sectors directly affected by the haze, such as tourism, now contribute a larger share of GDP."

The timing of the haze also hits just as Singapore's economy is feeling the drag of the United States' impending exit from its stimulus policy and China's growth slowdown.

Coming on top of domestic restructuring pains, this means that even a small drag could prove significant for the economy's already tepid growth outlook this year.

CIMB's Mr Song noted that in the last serious haze episode, in 1997, the economy was faring much better before the Asian financial crisis.

"The haze barely made a dent on full-year growth, which was about 10 per cent," he said. "But we have less room this time.

Much will depend on the severity of this latest episode." Still, in the bigger scheme of things, economists do not expect the whole economy to be derailed by the haze.

"The full-year projection of 1 to 3 per cent growth can still be achieved because we are likely to see a strong rebound in activities in the fourth quarter, led by the return of tourists and the construction sector," said Mr Song.

"Recall the Bangkok floods 2011: there was a big hit to the economy in the fourth quarter but then a big rebound in the first quarter of 2012."

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