Shock waves from US terror attack continue to be felt

WASHINGTON - Shock waves from Tuesday's devastating attacks are still rippling through the global economy with recession talk unabated as policymakers and bankers wait to see whether Wall Street can rise from the ashes that cover the heart of the world's financial system.

Three days after hijacked planes flattened New York's World Trade Center, a key part of the city's financial nerve centre, and damaged the Pentagon near Washington, some global economic officials conceded that the horrific events have dealt a body blow to global economic prospects.

"The events in the US have hit the world economy at the worst conceivable moment," Bank Austria Chief Economist Marianne Kager told a news conference in Vienna.

"We expect this to have an additional negative effect on the US economy in the second half, which means hopes of an early recovery are buried."

European Monetary Affairs Commissioner Pedro Solbes said the attacks cut the chances of a US third-quarter economic recovery and made him more pessimistic about European growth.

Initially, officials tried to put a brave face on the events, saying they believed the effects would be transitory.

US Federal Reserve Chairman Alan Greenspan, able to soothe markets with a well-chosen phrase, has remained silent since Tuesday's strikes and has no public appearances planned until next Thursday.

But US Treasury Secretary Paul O'Neill fought the rising chorus of gloom, insisting the American economy is not destined for recession.

"I didn't think we were heading into a recession on the 10th of September," the Treasury chief said in an interview on CBS television. Pressed about whether he thought the economy was now headed into a recession, he replied, "No, I don't."

"I have a high degree of confidence that America will go forward, our economy will go forward," he added.

European stocks, having held up on Thursday sparking hope the financial meltdown many had forecast right after Tuesday's events might not materialise, tumbled 5 per cent on Friday to levels not seen since December 1998.

Speculation rose of possible co-ordinated intervention to prop up the US dollar, down 4 per cent against the yen and 2 per cent against the euro since Tuesday on fears of an escalating conflict.

US Treasury bonds, often regarded as a safe haven in troubled times, rose for the second straight day on a growing conviction that the Fed would cut interest rates, but stock markets as far flung as Turkey and Brazil were battered.

As shell-shocked financial markets struggle to grasp the enormity of recent events, central banks are uncertain how to respond apart from keeping financial markets afloat.

Central bankers have sought to soothe markets by offering words of restrained optimism and by pumping over $100 billion into markets to ensure their proper functioning. But Andrew Crockett, head of the Bank for International Settlements, conceded it was hard to know what actions are needed.

"It is not easy to say what policy initiatives are appropriate, but they will be considered on an ongoing basis," said Crockett, who also heads a body sponsored by the Group of Seven industrial countries charged with maintaining stability in financial centres.

Since Tuesday, trading in Asian and European markets has been subdued as investors try to assess what impact the attacks will have on the US economy. Indeed, it seems impossible to gauge the full impact of the terror attacks since Wall Street, the bellwether of global stock markets, has remained closed since Tuesday -- the longest such closure since World War I.

A day of mourning on Friday was marked at the New York Stock Exchange, usually a frenetic hive of activity, by its bell ringing at noon before an empty, silent trading floor.

While some hope Monday's resumption of stock trading in New York yields a patriotic rally like that seen after President John F. Kennedy's assassination in 1963, most expect the Dow Jones index to trade lower by anything up to 500 points.

Canadian stocks lost 3 per cent on Friday, stumbling to levels not seen since late 1999 in what some saw as a harbinger of what to expect from New York on Monday.

The dollar fell across the board on reports that Afghanistan's Taleban regime had threatened to retaliate against any US attacks on their country.

The long-term prospects for global growth are likely to hinge on how the US government and consumers respond.

Most economists in recent days have grown ever gloomier in their forecasts and comments. A Reuters survey on Friday showed 12 out of 22 economists cut forecasts for European economic growth in 2001 since early August. Nine of the 12 economists gave the attacks on the United States as their reason.

Should the United States fall prey to a deep recession, it is easy to see how the rest of the world would also suffer.

Wells Fargo Bank Chief Economist Sung Won Sohn noted that the world's richest economy is a magnet for 83 percent of Canada's exports; 30 per cent of Japan's; 22 per cent of Europe's; 22 per cent of Asia's excluding Japan; 60 per cent of Latin America's; and a huge 88 per cent of Mexican exports.

With American confidence now the key to the fate of the broader global economy, Sohn said, how President George W. Bush responds to the tragedy is a critical economic question.

"How quickly and decisively President Bush can identify and punish the criminals behind the current tragedy will be important for confidence," Sohn said.

Ratings agency Standard and Poor's said the US economy should pull through with only a short and moderate recession.

"As severe and devastating as the ... terrorist attacks on New York and Washington are, they will not stop the US economy or collapse the US financial markets," S&P said.

Stephen Roach, chief economist of Morgan Stanley, had little doubt the US consumer, laboring under the pressures of depleted savings, debt and unemployment, would be hit.

"This shock, in conjunction with a very ominous set of fundamentals, is a lethal combination for the American consumer," concluded Roach. "This tragedy could well be the tipping point to the recession of 2001."

Roach has cut his call for world growth this year to just 1.5 per cent from an already anaemic 2.0 per cent.

With the US outlook faltering, confidence badly bruised, European growth sputtering and Japan sliding toward recession again, it has become hard to see how a global recession can be avoided. Even before this week's events, the world's economy was hovering dangerously close to recession.

While much in the outlook is shrouded in doubt, some things are almost certain. Tuesday's images of hijacked airliners crashing into world-famous landmarks will deal a severe blow to tourism, leading to billions of dollars of losses.

The insurance industry also seems set for billions of dollars of losses and experts say businesses will likely spend much more on security in the coming months and years -- something that will dampen already muted corporate profits.

The world airline industry has said it now faces "record losses" running into billions of dollars, possibly forcing some airlines into bankruptcy and causing thousands of jobs cuts.

The retail sector will be hard hit if consumers stay at home -- something bad for credit card and financial companies.

Waves from the attack continue to wash up in Asia where speculation is rife the Bank of Japan will take further easing steps at its regular policy meeting Tuesday and Wednesday.

Many also expect the Federal Reserve to move even sooner with a cut of key short-term interest rates of as much as a half a percentage point.

- REUTERS

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