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Is the US headed for a recession?
January 26, 2008
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Hello and welcome to Perspective with me, Melanie Yip.
Fears of an impending US economic slowdown prompted massive
sell-offs in stock markets all over the world recently.
Many
Asian stock markets also felt the shocks.
Singapore's
Straits Times Index saw its worst one-day plunge in almost two
decades when it fell by 6 percent on 21 January.
Many
analysts attributed the panic attack to the lull in the performance
of the US housing sector, caused by the sub-prime crisis late last
year.
Philip Overmyer, Chief Executive of the Singapore
International Chamber of Commerce elaborates.
PO: The
fact that these mortgages are coming up for a change in their rate
level. They were offered at very low discounts and now they are
coming to the point where the banks and the lending institutions
raise the rates and people have discovered they can’t pay the
increased rates so they default on their mortgage. These sub-prime
rate mortgages had been sold and resold and packaged and bundled
into different kind of economic and financial vehicles and sold to
banks, and individuals and funds all over the United States and of
course to some extent, all over the world at the same time. The
problem is people didn’t have a full understanding about what they
had invested in and not only individuals but large corporate
institutions and only now over the last several months, they’ve
discovered that as these funds default, they have enormous financial
risks and liabilities that are outstanding, so that’s the basic
cause of the problem. What’s happen in the last couple of weeks is
that these financial institutions have started to report on their
results which reflect these enormous financial losses and we’ve seen
that with companies like Citibank, with Bank of America, Merrill
Lynch and other firms like that pulling down the now core financial
institutions in America.
While fourth quarter results on
the US economy will continue to show limited growth in both
employment and consumer spending figures, it remains unclear if the
US will definitely head towards a recession, says Mr Overmyer.
PO: In the Christmas period, we saw much lower spending
by consumers and the United States economy is heavily a
consumer-driven economy so we clearly have seen the beginnings of a
slowdown in the economy. Will it turn into a real recession or not?
I think people today are betting probably so to some degree.
However, most of everyone continues to think that as this sub-prime
issue filters out of the news and through the financial institutions
that the fundamentals in a number of industries, as you mentioned
the electronics industry is very strong and that that will tend to
pull the economy back up towards the later half of 2008.
Chief Economist for Asia excluding Japan from Singapore’s
Daiwa Institute of Research, P K Basu offers his take on the steps
Asian markets can take to soften the impact of a volatile stock
market.
PKB: There is a little bit of fluff in the
property market but the real economy is sound and is set to continue
to grow strongly. There was one quarter of contraction that was
purely because of pharmaceuticals. Pharmaceuticals are rarely weak
for more than 2-3 months at a time. They are likely to resume their
normal, strong growth in the first quarter, and we’re going to get
another quarter of very good economic growth in Singapore in the
first quarter of this year, and into the rest of this year.
Similarly, if you look at the rest of Asia, when it appeared from
1990-1993 that the US was facing a similar period of sluggish
growth, Asian exports continued to grow more than 10% right through
that period. So I think something similar will happen this time
around, and even more so because there’s ample scope for domestic
demand to pick up around the region. That’ll boost intra-Asian
exports and keep Asia’s growth engine chugging along very
nicely.
One strong indicator that Asian markets are able
to tide over the economic crisis is the increasing economic presence
of emerging superpowers like China and India. This according to
David Cohen, Director of Asian Economic Forecasting at Action
Economics in Singapore.
DC: The Chinese and Indian
economies certainly have a much bigger profile on the global economy
than they did just a couple of years ago. They have been growing
very strongly, contributing the biggest portions of global economic
growth. What is unknown is how much, in turn, will they feel the
impact of a US slowdown, in particular, China where the US is a key
customer and would the US slowing down still feed back to the rest
of Asia? And could the momentum that is evident in today’s strong
GDP report for China in Q4 be capable of sustaining still healthy
growth in Asia in 2008? I think the mainstream view is that perhaps
growth will slow from the very strong pace in 2007, but Asia will
still enjoy respectable growth in 2008.
Singapore’s
Prime Minister Lee Hsien Loong has expressed confidence about
Singapore’s ability to weather a possible economic downturn.
Mr Lee added that the government will stick to its growth
forecast of 4.5 to 6.5% this year, despite fears of sluggish
performance in the US economy.
George Abraham, Chairman of
the GA Group in Singapore – explains the reasons behind Prime
Minister Lee’s confidence.
GA: One has to look at the
larger perspective as to what Singapore has achieved since the last
melt-down in 1997. Some of the measures that have been put in place
in terms of bank reforms, fiscal policies and also new kinds of
investments that have come in including the integrated resort that
are planned to take off in the next couple of years. I would say
there are three things going for us which are very positive. One is
we have always served the economies in the region with our export
services. And we have a whole lot of events that are now building up
in Singapore, and this has been growing in the last five years. And
more importantly, we have been enjoying a construction boom, and
there are so many projects in the pipeline that should keep the
construction sector active. In the case of Singapore, the fact that
we have over the years been signing free trade agreements with our
major trading partners and working out effective measures for
increased bilateral trade, which is accompanied by the flow of
direct investments into those countries, all these are factors that
would certainly help.
Mr Abraham also pointed to
Singapore’s increasing ties with China and India as one of the
factors which might help Singapore weather this storm.
GA: We have always enjoyed good trade relations with them
but this has seen a great increase. And this increase is not only
bilateral, but also in terms of companies locating here. According
to available figures, I think there are almost 3,000 or more Chinese
and Indian companies, which makes a total of 6,000 plus operating in
Singapore. And they are in various services. Both these markets have
been a good source of exports for Singapore. And exports not just of
goods, but also of services. Now, India for example has seen an
increase in the demand for consumer goods which are basically in
higher end technology, superior end products and in the various
kinds of consumer durables that are used by the middle class. This
has seen a big jump in the exports that we have made to India for
example. So the fact that we have very good economic relations which
are also substantiated by investments in infrastructural areas where
they need help, this is something that is going to help us.
For those of you deliberating on how best to take stock of
the Asian market volatility and get the best out of your dollar,
Chief Marketing and Strategy Officer of AXA Singapore, Annette King
has this advice.
AK: Keep a view on their long term
financial goals and keep their plans in place and money invested
because markets do go up and down from time to time. But generally,
our advice is to stick to your plan, so if you have queries, go back
to a qualified financial advisor and make sure you got those queries
answered. One of the worst things that people can do, unless they
have got immediate needs for their money right now, one of the worst
things people can do is to sell or re-balance when the markets
plummet, because it is likely selling when the prices are low.
Usually people buy when the prices are low like any bargain sale in
the great Singapore sale. Now is a great time to buy when you’ve got
spare cash. But history shows that when you’re selling out of
markets in decline and over the long term, it will actually cost you
money.
Following the stock market tumble, the US Federal
Reserve announced an unprecedented 75 basis point cut in interest
rates to appease market volatility.
This followed the Bush
Administration’s recent announcement of a multi-billion dollar
economic stimulus package, which includes tax rebates, and
incentives for new business investments.
However, market
response remains mixed on the sustainability of a rate cut by the
Fed,.
Some accuse the rate cut measure of coming in too
little and too late.
The Fed will next meet again in one
week’s time to deliberate on the best possible solution to ease
fears surrounding a US economic slowdown.
How global markets
will react to that then is anyone’s guess.
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