Terrorist attacks slow world growth at 'vulnerable' time

Economic forecasters trying to assess the impact of the terrorist attack on the United States appear to have reached a consensus. They say it will cause a fairly sharp slowdown in growth for 18 months.

The World Bank issued its revised forecasts this week, predicting growth in developed countries will be 0.9 per cent this year, slightly down from an earlier forecast of 1.1 per cent, and 1-1.5 per cent next year, a sharper reduction on the original prediction of 2.2 per cent.



In a paper called "Impact of the September 11 events on Developing Countries: A Preliminary Assessment", the World Bank attributed the downturn to the fact that "the terrorist attacks hit the global economy at a particularly vulnerable moment".

The key factor for the world economy is what will happen in the US and, more specifically, whether the continuing interest rate cuts by the Federal Reserve will be sufficient to overcome fears of further terrorist attacks.

Both of the major readings of consumer sentiment - done by the Conference Board in New York and the University of Michigan - show that confidence has been badly jolted by the terrorists.

The Conference Board reading fell by 14.4 per cent in September, taking the largest one-month tumble since October 1990, when the US was preparing to go to war against Iraq, which had invaded Kuwait.

The University of Michigan index of consumers' expectations about the future fell to 73.5, a plunge of 13.7 per cent from the August reading. The only two previous times that this index has fallen by similar amounts was the 1990 period leading up to the Gulf War and the 1973 Arab oil embargo.

Richard Curtin, director of the Michigan survey, said significant differences were seen between the short and successful Gulf War, after which consumer sentiment rebounded sharply, and the current, perhaps lengthy fight against an elusive foe.

"Fear is the new element for the US economy ... This apprehension about domestic security and fearfulness of travel in general."

Before September 11 most analysts had believed the Fed's rate-cutting campaign would succeed in ensuring that the US economy - which slowed to a barely discernible 0.3 per cent growth rate from April to June - posted a solid rebound in the second half of this year.

But now, in the light of the huge layoffs in the airline and tourist industries and rising consumer unease, many analysts believe the country is now in a recession which will probably last until the spring of next year.

David Wyss, chief economist at Standard & Poor's in New York, said that although the continuing credit easing should be enough to revive the economy in the early part of next year, an unusual amount of uncertainty still surrounded the economy.

"A lot will depend on how the war will play out and whether there will be more terrorist attacks."

Even Treasury Secretary Paul O'Neill now says that the gross domestic product may have dropped into negative territory in the just-completed July-September quarter.

But Treasury spokeswoman Michele Davis said Mr O'Neill was still confident that growth can resume in the fourth quarter "if we take the appropriate policy steps".

The Administration is preparing a new economic stimulus package that will include extra spending and tax relief for individuals and businesses to fight off a recession. Even if the country does suffer a recession - two consecutive quarters of falling GDP - most analysts are looking for a rebound at least by the second half of next year, fuelled by the Fed rate cuts, tax cuts and increased Government spending.

Bruce Steinberg, chief economist at Merrill Lynch, forecasted that GDP would shrink at an annual rate of 1 per cent in both the third and fourth quarters of this year but would resume growth of 2.2 per cent in the first quarter of next year.

If the US economy does rebound strongly early next year, then the likelihood is that the global economy will do the same.

The World Bank report on the aftermath of the terrorist attacks acknowledged the possibility of a strong rebound but warned of considerable uncertainty.

"The depth of recessionary trends and the speed of recovery," the bank said, "will depend on market psychology and future policies as well as unpredictable military events."

To ensure that the rebound is a strong one in 2003, the bank urged national Governments to ensure a "vigorous and vigilant" policy response.

The bank also called on industrialised nations to provide more development finance as private capital flows dry up, and to demonstrate commitment to a round of trade talks for developing countries.

Developing countries, meanwhile, should concentrate on structural reforms to encourage investment, it said.

Sharemarkets around the world have continued to perform hesitantly.

George Rodriguez, senior vice-president of equities at Guzman & Co, said: "Cash is king. It may continue this way until some action is taken and we are able to get better visibility."

- AGENCIES