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* Euro area debt crisis deepens; Italy, Spain in focus
* Global manufacturing sector close to stalling, orders fall
* One in three chance of U.S. recession-Lawrence Summers
* Pressure on Fed to signal extended support for economy
* Analysts cut earnings forecasts
By Neil Fullick
SINGAPORE, Aug 3 (Reuters) - In a matter of days, investor
relief that the United States avoided default has been replaced
by fears Europe's debt crisis is deepening and the world's
biggest economy may be slipping back into recession.
Former U.S. Treasury Secretary Lawrence Summers said in a
Reuters column there is a one in three chance of a U.S.
recession. According to number crunching by Goldman Sachs,
history suggests the economy is perilously close to tipping over
Signs are little better elsewhere. Italy and Spain are
edging closer to the euro area debt danger zone, China's economy
is slowing and Japan is mired in recession after the March
The gloom is hitting the corporate world as analysts cut
earnings forecasts globally, especially in export-led economies,
and big banks have announced tens of thousands of job cuts.
"The odds of the economy going back into recession are at
least one in three if nothing new is done to raise demand and
spur growth," Summers said of the United States in his column.
"If these judgements are close to correct, relief will soon
give way to alarm about the United States's economic and fiscal
The alarm bells may already be ringing. Most worryingly for
financial markets, the U.S. administration's commitment to
fiscal spending cuts could make any U.S. downturn worse.
"The slide in U.S. growth expectations clearly comes with
very poor timing," said Commerzbank strategist Rainer
The bellwether S&P 500 index dropped more than 2.5
percent on Tuesday to wipe out 2011 gains after data showed U.S.
consumer spending fell in June for the first time in nearly two
The figures underlined the frail state of the U.S. economy,
which grew at less than a 1 percent annualised rate in the first
half of 2011 in what Deutsche Bank describes as a growth
recession, not recovery.
Worryingly for investors, the S&P index crashed through its
200-day moving average, pointing to further weakness ahead.
"I think the conditions have completely changed this week,"
said Koichi Ono, senior strategist at Daiwa Securities Capital
Markets in Tokyo. "Until last week, people have been saying the
U.S. debt ceiling was the problem. Now they talk about worries
about the health of the economy."
Asian shares followed suit on Wednesday, falling more than 2
percent. Worried investors returned to the safe havens they used
during the U.S. debt talks, pushing gold to a fresh record high
and keeping the Swiss franc close to a record high against the
Financial market pressure increased on Italy and Spain,
pushing their borrowing costs to 14-year highs and sparking
emergency talks among EU policymakers.
The economies of Spain and Italy are much bigger than
Ireland, Portugal and Greece that have been bailed out so far in
the euro area debt crisis. The rise in yields is the latest sign
investors feel policymakers have not done enough to resolve the
"The fear of the market is that the world is going into
recession ... and in the euro zone the peripheral markets are
the ones that will suffer most," said Alessandro Giansanti, a
strategist at ING Amsterdam.
Views on the economic outlook were rapidly being revised,
with JPMorgan cutting its forecast on 2012 U.S. growth to 1
percent and markets reflecting expectations of more than 80
basis points of rate cuts in commodity exporter Australia -- 60
basis points more than a day ago.
If the U.S. unemployment rate keeps rising, it would be a
strong warning signal that the U.S. economy is close to another
recession, Goldman Sachs says.
Its examination of unemployment figures dating
back to 1948 shows there is a 76 percent chance the U.S. economy
is either in recession or will be within six months when the
jobless rate rises by a little over three-tenths of a percentage
point over a three-month period.
If data on Friday shows a jobless rate of 9.3
percent for July, and it stays at that level in August, those
conditions will have been met.
Friday's report is expected to show the
unemployment rate held steady in July at 9.2 percent.
Carmakers such as Chrysler and General Motors Co are
feeling the impact of the weak consumer spending. The U.S.
market is "tougher than a cheap steak," said Chrysler's head of
U.S. sales, Reid Bigland.
Washington's agreement to cut future spending
leaves the administration with no room to loosen its fiscal belt
to support the stumbling economy, especially with the threat of
a ratings downgrade.
That puts more pressure on the Federal Reserve, which meets
next Tuesday to review policy, to strengthen its commitment to
rock-bottom interest rates or even consider a third round of
"It's too soon to go to something like full scale QE3, but
it's not too soon to signal concern," said John Richards, head
of strategy at RBS Americas.
Although America dominates the world economy, there are
signs of a slowdown globally.
The world's manufacturing sector came close to stalling in
July, expanding at its shallowest pace in two years. New orders
fell for the first time since major economies were recovering
from the global financial crisis, a report by JP Morgan showed.
A purchasing managers' index from HSBC showed China's
factory sector shrank in July, although a government measure
showed it maintained weak growth.
Many economists say China's slowdown this year is modest and
not a sign of an impending slump. But some say Beijing is
treading a fine line between fostering growth and fighting
inflation as its tightening campaign runs into its 10th month.
Sensitive to the ups and downs of the global economic cycle,
banks have announced close to 50,000 job cuts, starting now and
continuing in coming years. HSBC and Lloyds
Banking Group have announced the biggest cuts.
Analysts are cutting earnings forecasts globally, with those
in export-dependent economies such as Taiwan, Singapore and
Australia bearing the biggest cuts.
Out of 22,000 stocks tracked over the past 30 days, analysts
have downgraded their earnings estimates by 0.5 percent on a
Nearly 75 percent of changes in estimates in Taiwan have
been downgrades. In Australia, 65 percent were downgrades and in
Switzerland it was nearly 80 percent.
(Editing by Dean Yates)
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