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Economy's outlook just got hazier

Choking smog from Indonesia could make for a limp finish for an already-weak Q3 following soft manufacturing data and market volatility

With the air quality at unhealthy levels, economists expect to see a decline in domestic spending, as more consumers choose to stay indoors and outdoor events are cancelled.


SINGAPORE'S already weak economic outlook is getting even more foggy. As a stubborn blanket of haze engulfs the island, economists expect retail sales to take a hit - even with the F1 festivities ahead - driving the wobbly third quarter to an even softer finish.

OCBC economist Selena Ling told The Business Times: "It's just going to add to the deteriorating picture. It's such bad timing . . . Coming on the back of manufacturing weakness, financial market volatility and the equity market going on a bit of a roller coaster ride.

"The more negative factors stack up, the higher the chances of a technical recession. We still expect (the services sector) to show positive growth and contribute to Q3 overall growth - but it's going to lend less support now."

Singapore's air quality continued to deteriorate on Monday, extending a two-week long period of haze due to the burning of Indonesian forests and land. As at 10pm on Monday, the three-hour Pollutant Standards Index (PSI) was 242; the 24-hour PSI was 131-165.

On the same day, Indonesia declared a state of emergency in Sumatra's Riau province, with its air quality having reached dangerous levels from forest fires.

The worsening conditions have heightened concerns over the possibility of a technical recession in the third quarter, which is defined as two straight quarters of sequential contraction in gross domestic product (GDP).

On its own, the haze may seem too small a factor to weigh heavily on Singapore's growth outlook, but economists told BT that the smog only compounds existing economic headwinds.

On the manufacturing front, July's industrial production contracted far more than expected, with factory output declining 6.1 per cent year on year. That was the sixth straight month of contraction.

The shaky global economy has also clouded earlier optimism for most services clusters, given the ongoing pullback in sentiment surrounding China and the US interest rate uncertainties.

CIMB Private Banking economist Song Seng Wun said: "Net-net, there will be some overall drag on economic activities in general. The question is the extent of it, mainly because of the intermittent nature of these weather conditions."

With the air quality at unhealthy levels, economists expect to see a decline in domestic spending, as more consumers choose to stay indoors and outdoor events are cancelled. Already, several running races have been called off or scaled down into walks; food & beverage (F&B) establishments are also expected to suffer, with a slide in demand particularly at alfresco eateries.

Despite concerns over how the haze would affect the staging of Formula One's Singapore Airlines Singapore Grand Prix - to be held from Friday to Sunday - organisers have stressed that they are well-equipped to handle the situation. F1 attendees from overseas are also unlikely to be deterred by the smog, especially since tickets have been paid for and hotels booked.

Indeed, economists do not think the haze will have a marked effect on the race festivities, although DBS economist Irvin Seah thinks that the publicity could prove to be a double-edged sword, given that it will be broadcast to millions worldwide. "The impact is more likely to be longer-term in nature. This race is going to be aired globally, and (the haziness) could affect a potential tourist's impression of Singapore," he said.

Still, economists say some e-commerce outfits could stand to benefit during this period - specifically, they expect haze-busting products, such as N95 masks and air purifiers, to see a boost in sales online or off.

Said Mr Song: "At the end of the day, we could see an even softer end to Q3 if these hazy conditions continue to persist. But there's not much we can do over here, except just gripe about it. In fact, just go have a beer and boost our F&B sales."

READ MORE: Haze seen dealing Singapore tourism sector fresh blow