Risk of US double-dip recession rises: S&P

WASHINGTON: The odds the United States will slip back into recession next year have risen, ratings agency Standard & Poor's said, citing risks from the European debt crisis and budget tightening at year-end.

The US ratings firm raised the chance of the US falling into recession to 25 per cent, up from a 20 per cent chance estimated in February, as the world's largest economy struggles to recover from a severe 2008-2009 slump.

It also pointed to the looming possibility of the government being forced by existing law to severely cut spending and increase taxes on January 1, the so-called fiscal cliff that would crunch the economy.

"Economic activity has downshifted sharply from earlier this year," S&P said in a report on North American credit conditions amid global uncertainty, dated August 20.

"At the same time, possible contagion from the European debt crisis, the potential so-called 'fiscal cliff', and the risk of a hard landing for China's economy have added greater uncertainty to US economic prospects," it said.

In the second quarter, the world's largest economy grew at a 1.5 per cent annual rate, a sharp slowdown from late last year as unemployment remained stuck above 8.0 per cent.

S&P underscored concern about the impact of a recession in the 17-nation eurozone, whose economy contracted 0.2 per cent in the second quarter. S&P forecast a 0.6 per cent contraction this year.

"A double-dip recession in Europe that transmits financial turmoil to the US could push it into recession," the agency said.

However, S&P said its baseline scenario for the US economy -- remained "modest growth," projecting a gross domestic product expansion of about 2.1 per cent for this year.

S&P also said it expected that politicians would agree before year-end to change the current severe budget cut and tax hike mandates to avoid the fiscal cliff fate.

However, it said, "We do not believe the US and European economies will improve substantially in the next year."

EU warns of recession in 2012

BRUSSELS: Europe warned on Thursday that its debt crisis was dragging the region towards a new recession, deepening the sense of foreboding as Italy and Greece struggled to put together new governments.

Amid a call by the head of the International Monetary Fund for an end to the political wrangling, it was still unclear who would emerge as the new leaders of Greece and Italy after both countries' premiers threw in the towel.

After doubts grew over Italy's ability to keep servicing its debts, the European Union's new economy tsar said the bloc faced tipping back into recession in 2012 due to a "vicious circle" of government debt, vulnerable banks and collapsed spending.

"Growth has stalled in Europe, and there is a risk of a new recession," Olli Rehn said as the EU released detailed forecasts for the eurozone and broader econonomy for the next two years, with GDP "now projected to stagnate until well into 2012."

Growth across the eurozone in 2012 would collapse to 0.5 percent, said the forecast, a steep drop from its previous prediction of 1.8 percent. The forecast for this year was also revised downwards from 1.6 to 1.5 percent.

The economy in Italy, the eurozone's third largest economy, would virtually stagnate in 2012 with growth of just 0.1 percent, according to the forecast.

Italy's growing crisis has already prompted Prime Minister Silvio Berlusconi to announce his resignation. He will stand down after parliamentary approval this weekend of a package of economic reforms aimed at calming investor fears, which have pushed Italy's borrowing rates to alarming levels of seven percent.

The handover of power has led to fevered backroom negotiations, with former EU commissioner Mario Monti seen as the frontrunner to succeed Berlusconi.

Monti received the backing on Thursday of Berlusconi, with the outgoing premier saying that he would work "in the interests of the country".

The 68-year-old Monti earned a fearless reputation as the European Union's competition commissioner taking on US corporate giants Microsoft and General Electric and is seen as a possible head of a national unity government.

Monti's appointment was not a done deal however after several leading members of Berlusconi's centre-right coalition insisted on early elections.

"Italy is facing a difficult time and particularly arduous choices to overcome the crisis," said President Giorgio Napolitano, who will be forced to call early elections if there is no consensus on a new government.

"Europe is urgently awaiting important signals of a taking on of responsibility by one of its founders. We will be up to the task."

On Wednesday, Italy's 10-year bond yields flew over 7.0-percent to heights that could make it impossible for Rome to keep financing its 1.9-trillion euro ($2.6 trillion) debt.

In a key test after Berlusconi's resignation announcement, Italy paid record rates of over six percent at an auction of treasury bills on Thursday.

Greece is also been in political turmoil since Prime Minister George Papandreou announced on Sunday he was standing down, triggering days of bickering between political leaders over the succession.

There was hope however that a new transitional government could be announced on Thursday whose first task will be to ratify a crucial EU bailout deal.

A meeting between President Carolos Papoulias and top political leaders opened at 0800 GMT with reports indicating that former European Central Bank vice-president Lucas Papademos would be given the reins of government in Greece's worst post-war crisis.

The Athens stock exchange was up 2.19 percent in morning trade in expectation of a deal on the fourth day of secrecy-veiled negotiations between Papandreou and the head of the opposition, conservative leader Antonis Samaras.

Europe's main markets plunged in early trading but staged a slight rally later in the morning. Frankfurt rebounded 1.04 percent and Paris added 0.98 percent, despite rising pressures in the French bond market.

Christine Lagarde, the head of the IMF, said both Greece and Italy urgently needed to sort out their leadership difficulties.

"Political clarity is conducive to more stability ... it is much needed in Greece, it is much needed in Italy," the IMF chief told journalists in Beijing.

Confusion over the future leadership of both countries was "conducive to volatility," added Lagarde, who is on a two-day visit to China.

The turmoil in parts of the eurozone has prompted questions about the single currency's whole future, including in the continent's economic powerhouse Germany.

According to a report in the German business daily Handelsblatt, MPs in Chancellor Angela Merkel's governing conservative party are mulling a move to permit countries to exit the eurozone without leaving the EU.

A motion from a group of lawmakers, which calls for any country's departure to be on a voluntary basis, is set to be discussed at the Christian Democrats' (CDU) party congress next week, Handelsblatt said.

Downturn: What it means

THERE is a chance Singapore may slip into a recession.

Compared to the first three months of this year, our economy contracted by 6.5 per cent in the April to June period.

If the European debt crisis and the US economic woes cause the economy to contract again in the July to September period, Singapore will enter into a technical recession (two consecutive quarters of negative growth).

A recent Bank of America Merrill Lynch report noted that there's a 59 per cent chance of Singapore entering a recession.

We look at how five sectors could fare if this happens:



Property

Property prices will drop.

But by how much will depend on the severity of the recession, if past recessions are any guide.

In the last recession between 2008 and 2009, property prices dropped about 25 per cent, said property consultancy SLP International research head Nicholas Mak.

But that wasn't as bad as the 1997-98 Asian financial crisis where property prices fell by 45 per cent, he said.

Mr Mak said that for those looking to buy a place to live in, the recession period could be a good time to monitor and buy on the low.

"But if you've a few properties on your portfolio, now may be a good time to lighten up," he added.

"During the down time, you could be hit by low rentals or even none.

And you also have to worry about negative equity or banks foreclosing on your properties.

"But if all your properties are fully paid up, then you don't have to worry."



Gold

When times are bad, look for the glitter.

Historically viewed as a form of protection against inflation and tumultuous economic times, investors pile onto gold because they think the price will rise.

Gold climbed to a record US$1,921.15 (S$2,317) an ounce earlier this week, reported the Business Times.

Gold is in the 11th year of a bull run, and analysts said the gold rush is far from over.

Mr Kelvin Tay, a Singapore-based chief investment strategist at UBS Wealth Management Research, believes that jewellery demand will remain strong, despite high and rising gold prices.

So holding on to your gold jewellery may help and having gold can be a hedge against recession.



Car

If the economy is weak and dips into a recession, Certificates of Entitlement (COE) prices will likely drop, said transport economist Michael Li of the Nanyang Business School.

He explained: "Demand for COEs will drop because people will delay the purchase of their car as they're not secure about their jobs and income.

"Fewer people will switch cars and (they) will tend to hold on to their old cars that are still working."

COE ended mixed at the latest tender yesterday as economic uncertainties dampened the appetite for big, luxury cars.

COE for cars above 1,600cc finished lower for the fourth consecutive tender at $63,002, down from $65,521.

But COE for cars up to 1,600cc finished higher.

It closed at $51,000, up from $49,301 two weeks ago.

Dr Li said global car manufacturers will lower the open market value (OMV) of cars here to clear their inventory, which will translate into lower prices.

OMV is determined by Singapore Customs, which pegs it to the car value declared by the importer.

His advice is to wait for the market to settle down, and for COE and car prices to drop.



Jobs

During a recession, businesses will be more cautious going forward, so wage growth and job creation will be moderate, said OCBC economist Selena Ling.

She added: "This also depends on the industry.

"For example, the manufacturing sector will be quite challenging because global demand (for goods and services) will be affected."

In such a situation, doing what you can to stay employable is important.

Taking courses to upgrade yourself is one way.



Stocks

The wild stock market roller- coaster swings are definitely not for the weak-hearted.

Analysts have made significant cuts - particularly for banking, property, and shipping and offshore counters - as the economic outlook grows murkier by the day, reported The Business Times on Tuesday.

CIMB research head Kenneth Ng said that if the recession escalates into a financial crisis, the Straits Times Index (STI) could go down to as low as 2,100 points.

Said Mr Ng: "If there's a recession, stock prices would fall as company earnings drop and sentiments get affected.

"People would also prefer to keep cash too."