Oct 1, 2008


Global recession feared if there is no rescue plan

The effect on Singapore: depressed asset prices and an export slump

By Fiona Chan

IF THE United States fails to pass some form of bailout plan, the world could be plunged into the worst global recession since the Great Depression, warned Singapore economists yesterday.

'In the worst-case scenario, if no plan goes through at all, we could see a far deeper recession in the US economy and the first global modern recession,' said CIMB-GK economist Song Seng Wun.

This would depress Singapore's asset prices, deepen its export slump and significantly weaken domestic demand, with mass retrenchments possible, added Citigroup economist Kit Wei Zheng.

But most economists are optimistic that some form of bailout will eventually be accepted by US lawmakers, who rejected Monday's proposal.

'Basically the Congress has no Plan B, so I think the bailout plan will probably pass through at some stage,' said OCBC economist Selena Ling.

The collapse of equity markets around the world yesterday after the shock rejection of the bailout would also likely 'force a rethink' by the Congress, Standard Chartered economists said.

Not everyone is rooting for a bailout, however. Investor Jim Rogers told The Straits Times that 'bailing out will make problems worse'.

Previous bailouts in Japan and the US propped up 'zombie companies' that should have been allowed to collapse and clean out the system, he said. In contrast, a sharp collapse in South Korea gave rise to one of the strongest growing economies in the last eight years.

Investment guru Marc Faber also told Bloomberg that a bailout would fail to avert a recession and any stock market rally it caused would be temporary.

With or without a bailout, signs of recession are gathering around the world.

US economists said the economy appears to have shrunk in the third quarter as consumers cut spending for the first time since 1991, Bloomberg reported yesterday. Further contraction is expected in the next two quarters, which would make the recession the longest in 20 years.

If no bailout is approved, what now looks like a long and moderate recession could turn into a long and steep decline, Mr Allen Sinai, chief economist at Decision Economics, told Bloomberg.

In London, British broadcaster ITV said it would cut about 1,000 jobs by March next year to reduce costs, according to a report by AFP.

Australian retailer Harvey Norman also plans to cut advertising, slow hiring and focus on costs amid growing fears of a recession, reported Bloomberg.

Around the region, analysts and economists said the impact of the failed bailout on Asian economies was minimal for now, but the slowdown in external demand would hit them eventually.

'The Thai financial sector is relatively strong, so the impact will be limited. But there may be an indirect impact because exports are a growth driver, and tourism is also a key contributor to the economy,' said Phatra Securities analyst Thanomsri Fongarun-rung in Thailand.

Japan's Fujitsu Research Institute senior economist Martin Schulz added: 'After the US and Europe, the next markets to go down will be those of emerging Asian economies, especially China, because their exports are down and so is their access to credit, which is badly needed.'

In Singapore, a technical recession is on the cards for the third quarter after dismal showings in manufacturing output, tourism and exports last month.

Job losses could be in the offing in manufacturing, retail and financial services, although the integrated resorts would create new jobs, said OCBC's Ms Ling.

To mitigate a possible recession, the Government could 'stand ready with relief measures for households, small businesses and disadvantaged groups', said Barclays economist Leong Wai Ho.

All eyes are now on the monetary policy review next month. Predictions for the Monetary Authority of Singapore (MAS) to adopt a neutral stance and allow the Singapore dollar to weaken have grown to a chorus, as signs point to faltering growth and tapering inflation.

But CIMB-GK's Mr Song believes that Singapore could come out of a recession quite quickly. 'Businesses and households are not as much in debt as before; there's enough fat to ride through a recession this time with fewer job losses and less falls in asset prices,' he said.

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Additional reporting by Robin Chan, Nirmal Ghosh and Kwan Weng Kin


'If the (bailout) isn't resolved this week and markets perform badly around the world, Monday will open with a strong decline in the Chinese market. If, and I think this is likely, the US Congress and Treasury can cobble together something by the end of the week, we will probably see markets strengthen on Thursday and Friday, and that should probably carry over into China on Monday.'
Professor Michael Pettis of the Guanghua School of Management in Peking University in China


'On the financial side, the direct impact on Japan will be minimal as overall, Japanese financial institutions are sound. But it will be more difficult now to secure economic growth through external demand. The US slump will affect emerging nations, which will in turn affect Japan.'
Senior economist Hisashi Yamada of Japan Research Institute in Japan