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

AFP

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 percent, up from a 20 percent 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 percent annual rate, a sharp slowdown from late last year as unemployment remained stuck above 8.0 percent.

S&P underscored concern about the impact of a recession in the 17-nation eurozone, whose economy contracted 0.2 percent in the second quarter. S&P forecast a 0.6 percent 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 percent 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.”